To combat untamed inflation, the Federal Reserve raised its key interest rate by another 0.75% on Wednesday — further increasing how much consumers will pay on debt like credit cards, mortgages and other loans.
The federal funds rate, which indirectly determines the cost of loans, has increased from near-zero to a range of 2.25% to 2.5%. This is the fourth rate hike in five months.
Rate hikes increase the costs of borrowing money, which can help slow inflation. But they also result in added costs for consumers already dealing with elevated prices for goods and services.
Here’s a look five things that will become more expensive:
1. Credit cards
With the Federal Reserve raising interest rates, your credit card’s annual percentage rate will likely increase within a couple of billing cycles. That means you’ll be paying more on any outstanding credit card debt that isn’t paid off by the end of the month.
A 2.25% year-to-date rate increase means that for a cardholder making the minimum payment on a $5,000 credit card balance, it will take an additional five months and $868 in interest to pay the card off completely, according to calculations provided by Bankrate.com.
2. Car loans
Auto loan lenders use the Fed’s benchmark rate to determine the interest rate you’ll pay on financing. This won’t affect borrowers already locked into fixed-rate financing, but new car loans or those with variable-rate financing will likely go up in cost.
A 2.25% year-to-date rate increase means that for a $35,000, 5-year new car loan, the monthly payment would be $36 higher now compared to a loan taken out at the beginning of the year, per calculations provided by Bankrate.com.
3. Adjustable-rate mortgages
The Fed’s benchmark indirectly affects rates on variable-rate mortgages, also known as adjustable-rate mortgages, or ARMs. Most homeowners are locked into fixed-rate mortgages, so they are unaffected by rate hikes unless they are refinancing or signing up for a new loan.
Borrowers with ARMs can expect a bump in the interest rate on their home loans, although it will vary based on the lender, the mortgage size and their credit score. That said, the average interest rate for five-year ARMs have nearly doubled since the beginning of the year, which coincides with four Fed rate hikes in that time.
4. Private student loans
Borrowers with federal student loans will be unaffected by the rate hike as interest rates for these loans are set by Congress, based on 10-year Treasury note yields. Plus, there is a payment and interest freeze on federal student loans still in effect through Aug. 31, which might be extended …….