It seems we can’t get away from it these days; everywhere we turn – the news, social media, at work, etc., we keep hearing about the Fed raising rates. Rates, rates, rates! But few of us understand what that actually means (or who the Fed is!), and how that impacts the normal consumer and average household in America.
So, today, we’ll give you a little background on the Fed, their rate-running campaign, and the nuts and bolts of what that means for you and me, the average consumers.
The Fed & rate hikes
The Federal Reserve – our central bank network – essentially hits the gas or brakes on our economy by manipulating their short-term benchmark rate, the cost of borrowing and lending among businesses. Throughout this year, they’ve been on a campaign to lower inflation by slamming on those brakes, executed by hiking the Fed rate.
Those Fed rate hikes not only slow the economy and eventually lower inflation (hopefully!) but also have ripple effects on other aspects of personal debt and household spending.
What do Fed interest rate hikes affect?
Credit cards
The Fed’s benchmark interest rate dictates the cost of lending for most adjustable rate loans, including the rate on many credit cards. You may have signed up for that credit card with an initial rate and APR, but deep within the fine print is the fact that your credit card company can change your interest rate under a slew of conditions or circumstances, including when the Fed raises its benchmark short-term lending rate.
So, your minimum payment, the amount of interest you accumulate, and the true cost of your credit card debt may be way on the rise in coming months and next year!
Auto loans
Car loans may also be affected by Fed rate increases, sending the already-rising cost of new and used cars soaring even higher. But the good news is that if you financed your car or truck purchase with a fixed-rate loan, your payment or the interest you pay won’t be affected.
HELOCs
Another type of loan under that adjustable-rate umbrella is HELOCs, or home equity lines of credit. Most of these loans that tap into home equity are fully adjustable, not fixed, so when the Fed raises rates, your rate and payment may go up, too. You may not see a big change to your payment if your HELOC is only $20,000 or $30,000, for instance, but if you accessed $80,000 or $100,000 through your HELCO, a rate increase can REALLY cost you more.
Savings Rates +
Let’s inject some good news into all of this talk of rate hikes and higher payments. When the Fed hikes rents, one financial tool that actually benefits is high-yield savings accounts. But the caveat is that banks may take a while to bump up what they offer on their savings accounts, and the benefit may be nominal unless you have a ton of cash parked in your bank’s savings.
CDs
Likewise, the payout for CDs (certificates of deposit) should also go up when the Fed increases short-term rates, a welcome development for those looking for a safe haven for their funds but still want to earn something.
Mortgages?
For potential homebuyers or those looking to refinance, they’ve gotten quite a shock recently, as the average 30-year-fixed mortgage rate has more than doubled since the start of the year, in large part as a reaction to the Fed’s aggressive interest rate hikes. And while mortgage rates aren’t directly based on the Fed’s benchmark rate, there is a direct correlation, so you can expect higher rates every time the Fed hits its rate increase button.
The good news is that there are still great home loan alternatives for those looking to buy or save by refinancing, including a 15-year amortized loan and Adjustable Rate Loan products (ARMs).
Contact your favorite mortgage broker for advice on getting the best possible mortgage loan right now, or we’re happy to recommend a few we know.
Other things
When the Fed raises rates, that means the cost of borrowing goes up for businesses across the country. When that happens, guess who ends up eventually footing the bill? YOU – the consumer! Retailers, brands, and businesses have higher costs across the board these days, from fuel and transport prices to hiring employees and supplies or merchandise, and the Fed rate hike means their profitability shrinks – unless they bump up prices accordingly.
Focus on your credit score to save $$$!
What’s one way you can fight back against rate increases and inflation? Boost your credit score! When your FICO or Vantage Score improves and reaches a higher bracket, banks, lenders, and account holders will offer lower interest rates as well as far more options for fixing rates, switching programs, or lowering fees.
With the economy on shaky ground, the Fed aggressively raising rates, and everything from credit cards to mortgage rates far more costly, a credit score increase through Blue Water Credit is the best way to protect yourself and save!
