The Federal Reserve recently raised interest rates by 0.75% bringing the federal funds rate to between 3% to 3.25%. In an effort to rein in inflation, the incremental increases are expected to continue through 2023 with rates expected to peak as high as 4.6% or higher.
Rising interest rates are intended to drive spending down as consumers will be realizing higher commercial interest rates on mortgages, credit card APRs and other loans. While creating limited demand could bring inflation down, it’ll also have a big impact on people’s finances in both positive and negative ways.
Here’s what that increases in the Federal Reserve’s rates mean for you and your finances.
Credit Card APRs
Due to the recent interest rate increases, average credit card APRs (annual percentage rate) have gone from around 16% just months ago to currently 18.1%. This increase can be extremely costly to your credit card bill if you’re just making the minimum payments, so it’s more important now than ever to avoid keeping balances on your card. Another way you can combat these expensive interest rates is to open a card with a 0% introductory APR on balance transfers or new purchases, so you’ll be able to avoid rate increases while paying down debt.
As always, fixed-rate mortgage rates won’t increase, but new mortgages or variable-rate mortgages will, as the latter are determined by the yield on the 10-year Treasury note, which is currently at its highest level since 2011.
For fixed rate mortgages, the 30-year fixed rate options have increased on average from 3% to 6%. In light of the volatility of a variable or adjustable rate mortgage, one way to combat rising interest rates is to consider using an aforementioned fixed rate mortgage. This way, after shopping for the best rates, you’ll be able to lock in that fixed interest rate contractually avoiding future increases.
Additionally, if you have a variable-rate mortgage, refinancing to a fixed-rate mortgage is also a good idea if you’re concerned about rates rising even more.
Vehicle loan interest rates are currently at the highest levels since 2012 and are expected to increase with the continued Federal Reserve rate hikes. High prices and limited supply, along with increased interest rates, are making it difficult for more people to purchase new vehicles.
Making sure your credit score is high can help you get a better rate on new vehicle purchases and associated credit products but it’s still important to shop around, whether it's at credit unions or smaller banks, before financing. See our how to improve your credit card score guide for more info.
Keep in mind other costs associated with your vehicle as well, such as insurance rates, which have risen 5% from 2021 to 2022 as well as fuel prices which continue to rise. Keeping interest rates and associated operating costs low can help manage your overall auto expenses during periods of inflation.
On a positive note, those with high-yield savings accounts will have noticed that these increasing interest rates also mean increased savings for them. Typically, when the Federal Reserve funds rate increases, banks will increase their annual percentage yield. You’ll especially see this APY increase in smaller banks, credit unions, or online banks, so you may want to consider banking where you’ll get the best options.
The Federal Reserve’s decision to increase interest rates by 0.75% will put a strain on borrowers as their loans become more expensive. Because of this, it’s important to pay off debts with the highest rates quickly to avoid the additional costs and expenses. Also, boosting your credit score with on-time payments and managing your debt ratio will help in getting lower APR rates on consumer credit products.
Understanding the APR on your current debts and staying ahead of the predicted rate increases will keep consumers out of financial straights and will move your future in the right direction.
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