How the expected interest rate hike will affect your wallet
The federal government is expected to start raising interest rates this week to help curb inflation.
If you're worried about how high credit costs will affect your finances, here's a breakdown of what to expect.
The first quarter-point rise in the rate of federal funds in three years will likely lay the groundwork for further increases that will follow.
The cumulative effect of interest rate hikes is what will really affect the economy and household budgets.
Typically, the higher the cost of lending, the less consumers will spend, and eventually the pressure on prices will cool down. But if you are worried about the meaning of your credit card, car loan, mortgage rate and student loans, here is a breakdown of what might happen.
credit cards
For starters, most credit cards have a variable rate, which means there is a direct link to the federal threshold.
Credit card rates are currently around 16.34%, down from a peak of 17.85%.
But expect your annual percentage rate to go up when the federal takes a step.
A single quarter-point rate hike is unlikely to turn the financial world of cardholders. However, all interest rate hikes, even small ones, are new and undesirable for people with credit card debt.
Borrowers with debt should find a credit card to transfer a zero interest balance while they can start paying the balance.
This is a tremendous opportunity to put yourself on the fast track to getting rid of debts.
Car loans
For those planning to buy a new car in the coming months, it is likely that a change in the federal interest rate will not materially affect the interest rate you will receive.
A quarter of a percent difference on a $ 25,000 loan is $ 3 a month, no one will have to downsize from an SUV to a compact car because of rising interest rates.
As with housing, the biggest barrier to buying a car is finding something in your price range.
Mortgages
As the federal raises interest rates, so does the fixed interest rate on long-term mortgages, as it is affected by the economy and inflation.
The average mortgage for a 30-year fixed-rate apartment has already risen to 4.14% - a full percentage point increase since November - and is expected to continue to climb.
Many homeowners with variable rate mortgages or home equity lines of credit, linked to prime interest rates, will also be affected.
A real estate company can explain and help you about mortgages and interest rate increases.
Student loans
Federal student loan rates are fixed, so most borrowers will not be immediately affected by an interest rate hike. However, if you have a private loan, these loans may be fixed or have a variable interest rate related to the LIBOR, prime or debt interest rate - which means that as the federal raises the interest rate, borrowers are more likely to pay interest.
This makes it a particularly good time to identify the loans you are facing and see if refinancing makes sense.
If you have private loans, nothing will stop you from refinancing if you find a lower rate, you just want to be careful not to refinance at a variable rate because they have nowhere to go but to go up.
Savings
Deposit rates will be much slower to respond to federal interest rate hikes, and even then, only slightly.
While the federal has no direct effect on deposit rates; They tend to be correlated with changes in the target rate of federal funds. As a result, the rate of savings accounts at some of the major retail banks is close to the bottom, currently only 0.06% on average.
However, because the inflation rate is now much higher than that, any money in savings loses purchasing power over time.
Banks are very slow to raise interest rates.
Look for other options with better rates, a place where your money will make all the difference.
Thanks, among other things, to lower expenses, the average online savings rate, which currently stands at close to 0.5%, is considerably higher than the average rate from a traditional bank.
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