This week, the Federal Reserve will likely hike rates an additional three-quarters of a percentage point for the third straight time in a bid to calm the high cost of living.
The US central bank has already raised interest rates four times this year, for a total of 2.25 percentage points.
Fed officials have “declared inflation ‘public enemy No. 1,'” said Mark Hamrick, senior economic analyst at Bankrate.com.
“They want to take their benchmark rate into restrictive territory and hold it longer while they wait for what Chairman Jerome Powell has said is ‘compelling evidence that inflation is falling,'” he said. “We are staying away from this destination.”
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The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to each other overnight. While that’s not the rate consumers are paying, Fed decisions still affect the rates they see every day on things like private student loans and credit cards.
The next rate hike will correspond to a rise in the prime rate and immediately lead to higher funding costs for many types of consumer loans.
“Whenever consumers borrow, they’re dependent on interest rates,” said Tomas Philipson, professor of public policy studies at the University of Chicago and former acting chairman of the White House Council of Economic Advisers. , whether for “housing, cars or appliances”. .”
What a rate hike could mean for you
Here’s a breakdown of some of the main ways a rate increase could impact you, in terms of impact on your credit card, car loan, mortgage, student debt and savings deposits.
1. Credit cards
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Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark index. As the federal funds rate rises, so does the prime rate, and credit card rates follow.
Annual percentage rates are currently near 18%, on average, which is an all-time high, according to Ted Rossman, senior industry analyst at CreditCards.com.
Additionally, nearly half of credit card holders are in credit card debt month over month, according to a report by Bankrate.com.
“It’s easy to get into credit card debt and hard to get out of it,” Rossman said. “High inflation and rising interest rates make it even more difficult.”
If the Fed announces a 75 basis point hike as expected, consumers with credit card debt will spend an additional $5.3 billion in interest this year alone, according to new analysis from WalletHub.
Variable rate mortgages and home equity lines of credit are also indexed to the prime rate, but 15 and 30 year mortgage rates are fixed and linked to Treasury yields and the economy. Yet anyone buying a new home has lost considerable purchasing power, in part due to inflation and Fed policy actions.
Along with the central bank’s vow to stay firm on inflation, the average interest rate on the 30-year fixed-rate mortgage hit 6% for the first time since the Great Recession, double what it was a year ago, according to the latest data. of the Mortgage Bankers Association.
As a result, demand for mortgages from homebuyers has fallen by almost a third since last year and fewer borrowers could benefit from refinancing.
Since the next rate hike is largely priced into mortgage rates, homebuyers will now pay about $30,600 more in interest, assuming a 30-year fixed rate on an average home loan of $409,100. , according to analysis by WalletHub.
3. Car loans
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Even though auto loans are fixed, payments go up because the price of all cars goes up along with interest rates on new loans, so if you’re planning on buying a car, you’ll be shelling out more in the months ahead.
The Fed’s next move could push the average interest rate on a new auto loan past 6%, though consumers with higher credit scores may be able to get better loan terms .
“Automobile purchases are big ticket items where interest rates are high,” said Edmunds Chief Knowledge Officer Ivan Drury. “They can make or break a deal, and rapidly rising interest rates could easily push many consumers beyond their comfort zone for monthly payments.”
Paying an annual percentage rate of 6% instead of 5% would cost consumers $1,348 more in interest over the term of a $40,000 auto loan over 72 months, according to Edmunds data.
4. Student loans
The interest rate on federal student loans taken out for the 2022-23 academic year has already fallen to 4.99%, down from 3.73% last year and 2.75% in 2020-21. It won’t budge until next summer: Congress sets the federal student loan rate each May for the upcoming academic year based on the 10-year Treasury rate. This new rate comes into effect in July.
Private student loans can have a fixed rate or a variable rate linked to Libor, prime or Treasury bills – and that means that as the Fed raises rates, these borrowers will also pay more interest. How much more, however, will vary with the reference.
Currently, average fixed rates for private student loans can range from 3.22% to 13.95% and 1.29% to 12.99% for variable rates, according to Bankrate. As with auto loans, they also vary widely based on your credit score.
Of course, anyone with existing student loan debt should check to see if they are eligible for federal student loan forgiveness.
5. Savings accounts
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On the upside, interest rates on savings accounts are on the rise after back-to-back rate hikes.
Although the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate and the savings account rates of some of the larger retail banks, which were at lowest since the start of the pandemic, are currently up to 0.13%, on average.
Thanks in part to lower overheads, the best performing online savings account rates are up to 2.5%, well above the average rate at a traditional bank.
As the central bank continues its rate hike cycle, these yields will also continue to rise. Yet any money earning less than the rate of inflation loses purchasing power over time.
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