As the Federal Reserve has lifted its key interest rate, Americans have seen the effects on both sides of the household ledger: Savers benefit from higher yields, but borrowers pay more.
Here’s how it works:
Credit card rates are closely linked to the Fed’s actions, so consumers with revolving debt can expect to see those rates rise, usually within one or two billing cycles. The average credit card rate was recently 17.25 percent, according to Bankrate.com, up from 16.34 percent in March, when the Fed began its series of rate increases.
“With the frequency of Federal Reserve rate hikes this year, it will be a drumbeat of higher rates for cardholders every couple of statement cycles,” said Greg McBride, the chief financial analyst at Bankrate.com.
Car loans are also expected to climb, but those increases continue to be overshadowed by the rising cost of buying a vehicle and the price you pay for filling it with gas. Car loans tend to track the five-year Treasury note, which is influenced by the Fed’s key rate — but that’s not the only factor that determines how much you’ll pay.
A borrower’s credit history, the type of vehicle, loan term and down payment are all baked into that rate calculation.
The average interest rate on new-car loans was 5 percent in the second quarter, according to Edmunds, up from 4.4 percent in the same period last year. Last month, the share of new-car buyers paying $1,000 or more per month on their loans reached a record of nearly 13 percent, Edmunds said.
Whether the rate increase will affect your student loan payments depends on the type of loan you have.
Current federal student loan borrowers — whose payments are on pause through August — aren’t affected because those loans carry a fixed rate set by the government.
But new batches of federal loans are priced each July, based on the 10-year Treasury bond auction in May. Rates on those loans have already jumped: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed the year-earlier period.
Private student loan borrowers should also expect to pay more: Both fixed and variable-rate loans are linked to benchmarks that track the federal funds rate. Those increases usually show up within a month.
Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to all of it.
Mortgage rates have jumped by more than two percentage points since the start of 2022, though they’re down from their highs, as fears of recession have led traders to temper their expectations for Fed rate increases in the future, despite stubbornly high inflation, pushing bond yields lower in recent weeks.
Rates on 30-year fixed rate mortgages averaged 5.54 percent as of July 21, according to Freddie Mac’s primary mortgage survey, down from 5.81 percent a month ago but up sharply from 2.78 percent a year ago.
Other home loans are more closely tethered to the Fed’s move. Home equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the Fed’s rates.
Savers seeking a better return on their money will have an easier time — yields have been rising, though they’re still pretty meager.
An increase in the Fed’s key rate often means banks will pay more interest on their deposits, though it doesn’t always happen right away. They tend to raise their rates when they want to bring more money in — many banks already had plenty of deposits, but that may be changing at some institutions.
Rates on certificates of deposit, which tend to track similarly dated Treasury securities, have been ticking higher. The average one-year C.D. at online banks was 1.9 percent in June, up from 1.5 percent the month prior, according to DepositAccounts.com.
The average five-year C.D. was 2.9 percent in June, up from 2.5 percent in May.