The Federal Reserve did not raise interest rates Wednesday, but it did set the stage for a September hike. That gives consumers time to firm up their finances.
Fed officials, including Chairman Jerome Powell, have already raised interest rates twice this year and pointed to two more increases before the end of 2018.
Yet just last month, President Donald Trump criticized the Fed, saying rate increases are hurting the economy. Despite the long-standing convention that monetary tightening is necessary to temper inflation, Trump favors holding rates down in the face of economic growth.
For the average American, rising inflation, which pushed the central bank into hiking rates back in 2015, isn’t necessarily bad. It’s generally considered an indication that the economy is doing well, and paves the way for raises and a better return on your savings.
However, in daily life, higher interest rates mean that you’ll have to pay more to access credit.
“The cost of borrowing has increased, whether you are dealing with mortgage loans, auto loans, student loans or credit cards,” said Ric Edelman, co-founder and executive chairman of Edelman Financial Services. “It’s more expensive now than it was a month ago and it’s projected that it will get higher still.”
If you’re concerned about what further increases in the Fed’s benchmark rate will mean for your own bank account, mortgage or credit card, as well as student debt, home equity loan and car payment, here’s a breakdown of what’s in store — and what you can do about it today.
For starters, credit card rates are already at a record high of 17.2 percent on average, according to Bankrate.com.
Most credit cards have a variable rate, which means there’s a direct connection to the Fed’s benchmark rate, and as interest rates rise, card holders will continue to get squeezed.
The typical American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian’s annual study on the state of credit and debt in America. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve.
Factoring in the previous rate hikes, credit card users will pay about $9.8 billion more in extra finance charges this year than they would have otherwise, according to a WalletHub analysis.
What you can do about it: Shop around for a better rate or snag a zero-interest balance transfer offer to insulate yourself from further rate hikes, advised Greg McBride, the chief financial analyst at Bankrate. Then, begin to aggressively pay down your balance.
The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there’s already been a spike since the Fed started raising rates.
The average 30-year fixed-rate is now about 4.71 percent, up from 4.09 percent in 2015. That has cost the average homebuyer roughly $42,000, WalletHub found.
Many homeowners with adjustable-rate mortgages or home equity lines of credit, which are pegged to the prime rate, will also be affected.
What you can do about it: Those with an ARM can still refinance into a fixed rate that’s lower than what your ARM will adjust to later this year, McBride said, “but you have to act quickly.”
If you have a HELOC, ask your lender to freeze the interest rate on your outstanding balance or consider refinancing into a fixed-rate home equity loan, although that puts a cap on how much money you can access, McBride added.
For those planning on purchasing a new car in the next few months, incremental rate hikes will not have any big impact on what you pay. A quarter-point difference on a $25,000 loan is $3 a month, according to McBride.
Currently, the average five-year new car loan rate is 4.83 percent, up from 4.34 percent when the Fed started boosting rates, while the average four-year used car loan rate is 5.5 percent, up from 5.26 over the same time period, according to Bankrate.
What you can do about it: If you are car shopping, start by checking that your credit is in good shape, negotiating the price of your vehicle and shopping around to secure the best rate on your financing.
“There are plenty of low rates still available, particularly if you have good credit,” McBride said.
Although the Federal Reserve has been raising interest rates, recent hikes largely haven’t trickled down to consumers in the form of better savings yields.
While the average interest rate on a savings account is still only 0.20 percent, some top-yielding savings accounts are now as high as 2.05 percent, up from 1.1 percent in 2015, according to Bankrate.
“Inflation has reached the Fed’s target of 2 percent, and this is the bogey that savers should be aiming for,” McBride said.
With a savings rate, or annual percentage yield, of 0.20 percent, a $10,000 deposit earns just $20 after one year. At 2 percent, that same deposit would earn $200.
“The tenfold difference is a testament to the need to shop around,” McBride added.
What you can do about it: Look to an online bank to find those significantly higher savings rates. (Online banks are able to offer higher-yielding accounts because they come with less overhead expenses than traditional bank accounts.) Here are some of the banks with the best savings yields.
While most student borrowers rely on federal student loans, which are fixed, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings.
Private loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates, which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
What you can do about it: If you have a mix of federal and private loans, consider prioritizing paying off your private loans first.
With another rate hike expected in September, it is important for consumers to continue paying down variable rate before borrowing costs escalate further, McBride said.
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How to lower your credit card costs before the Fed starts hiking rates
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