As the Federal Reserve has raised its key interest rate several times over the past year, Americans have seen the effects on both sides of the household ledger: Savers benefit from higher returns, but borrowers pay more.
Credit card
Credit card rates are closely tied to Fed actions, so consumers with revolving debt can expect to see those rates increase, usually within one or two billing cycles. The average credit card interest rate was 19.9 percent as of Jan. 25, according to Bankrate.com, up from about 16 percent last March, when the Fed began its series of rate hikes.
Car loan
Car loans tend to track the five-year Treasury bond, which is influenced by the Fed’s key interest rate — but it’s not the only factor that determines how much you’ll pay.
A borrower’s credit history, type of vehicle, loan term and down payment are all baked into this interest rate calculation. The average interest rate on new car loans was 6.5 percent in the fourth quarter of last year, according to Edmunds, up from 4.1 percent in the same period a year earlier.
Student loans
Whether the rate increase will affect your student loan payments depends on the type of loan you have.
The rate for current federal student loan borrowers — many of whom will see up to $20,000 in canceled loans under a Department of Education program, subject to legal challenges — is not affected because these loans have a Fixed Price determined by the government.
But new batches of federal borrowing are priced each July, based on the 10-year Treasury bond auction in May. Prices on them the loans have already increased: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed the previous year.
Private student loan borrowers should also expect to pay more: Both fixed- and variable-rate loans are tied to benchmarks that track the federal funds rate. These increases usually appear within a month.
Mortgage loans
Interest rates on 30-year fixed mortgages do not move in line with the Fed’s benchmark rate, but instead generally follow the yield on 10-year Treasuries, which is influenced by a number of factors, including expectations around inflation, the Fed’s actions and how investors react to it all .
After climbing over 7 percent in November, for the first time since 2002, mortgage rates had fallen to 6.13 percent in the week to Jan. 26, according to Freddie Mac. The average interest rate for an identical loan was 3.55 percent in the same week in 2021.
Other mortgages are more closely tied to the Fed’s actions. Home equity lines of credit and Adjustable rate mortgages — each of which has a variable interest rate — generally increases within two billing cycles of a change in the Fed’s interest rates.
Savings vehicles
Savers looking for a better return on their money will have an easier time – interest rates have been rising, but not uniformly.
An increase in the Fed’s key interest rate often means that banks will pay more interest on their deposits, although this does not always happen immediately. They tend to raise their interest rates when they want to bring in more money – many banks already had plenty of deposits, but this can change with some institutions.
Primis Bank, for example, recently introduced online savings and checking accounts with a rate of 5.03 percent. But rates at many of the major online banks — including Ally, American Express, Capital One, Discover and Marcus — were still 3.3 percent, according to Ken Tumin, founder of DepositAccounts.com, part of LendingTree.
“I expect some more upward movement after today’s Fed rate hike,” Mr. Tumin said, “but it appears online banks are generally in no rush to raise their deposit rates now.”
Prices of certificates of deposit, which tend to track similarly dated government bonds, have risen higher. The average one-year CD at online banks was 4.4 percent at the start of January, up from 0.5 percent a year earlier, according to DepositAccounts.com.
