There has been a lot of commentary about how interest-rate increases by the Federal Reserve will impact the economy. The Fed indicated Wednesday that it’s likely to lift rates six more times this year. Some experts are worried that will cause a recession.
But what do the rate hikes mean for you? The bad news is that interest rates on your loans will rise.
The good news is that the Fed has only raised its federal funds rate target by 25 basis points thus far, so your loan rates won’t soar. But if the Fed acts multiple times, the impact will add up.
Credit-Card Debt Strategies
Experts say you can expect rate increases for your cards in April or May. With credit cards having variable interest rates, rate changes on the cards closely track Fed rate moves. Credit card interest rates averaged 16.44% in the fourth quarter.
As for strategies to lower your credit card debt, you may be able to negotiate the interest rate with your issuing bank. To do that, you can start by calling customer service.
If you can take out a personal loan with a lower interest rate than your credit card charges, you can pay off the credit card debt with money from the loan. You also might be able to switch to a credit card that offers zero interest rates on transfers.
Other Factors for MortgagesThe Fed’s tightening doesn’t have as much impact on home mortgages, which are more affected by long-term interest rates, the economy and inflation. The fixed-rate 30-year mortgage averaged 4.16% in the week ended March 17, up from 3.85% a week earlier and 3.09% a year earlier, according to Freddie Mac.
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Raging inflation is helping to send mortgage rates higher. So is the Fed’s decision to stop buying mortgage bonds and its preparation to sell some of them.
One strategy for homeowners with variable rate mortgages would be to convert to a fixed mortgage now, before Fed rate hikes begin to really boost your rate.
“Additional increases in mortgage rates will further squeeze buyers’ budgets and may limit first-time buyers’ ability to qualify for a mortgage, especially with prices continuing to advance,” George Ratiu, senior economist at Realtor.com, told MarketWatch.
Little Impact on Auto LoansAs for auto loans, their rates may not be greatly affected by the Fed. A borrower’s credit history is generally more important.
Someone with an excellent credit rating might get a rate close to zero, while someone with a lousy score might have to pay 20% or more, Jonathan Smoke, chief economist at Cox Automotive, told The New York Times.
In any case, a 25-basis point increase on a five-month, $25,000 loan would mean a monthly payment increase of just a little over a dollar per month.
To be sure, the effect of multiple Fed rate increases would add up. Take 2015-18, when the Fed raised rates by 2.25 percentage points.
At the beginning of the period, the average interest payments for the life of a car loan totaled $4,039, according to Edmunds.com, as cited by MarketWatch. By the end of the period, payments totaled $5,739. The interest rate on the loans rose to 5.9% from 4.5%.