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Here's what Fed's 0.75% rate hike -- the most in 28 years -- means to you

Dec 3, 2022

What does the federal funds rate mean to you?

The federal funds interest rate is the rate at which banks lend and borrow to each other overnight. It is set by central bank. Although it is not the rate consumers pay each day, Fed moves affect the savings and borrowing rates that consumers see every day.

Spatt stated, "We are certain to see the price of borrowing increase relatively rapidly."

With rising rates and economic uncertainty ahead, consumers need to take steps to stabilize finances. These include paying down debt, particularly high-interest credit card debt and other variable rate debt.

Pay off high-rate credit

Because most credit cards have variable interest rates, they are directly connected to the Fed benchmark. Short-term borrowing rates are therefore already rising.

Credit card rates average 16.61% and are significantly higher than any other consumer loan. However, they may rise to close to 19% in the next year according to Ted Rossman of CreditCards.com, who is a senior industry analyst.

If the APR on your credit card rises to 18.61% by the end of 2022, it will cost you another $832 in interest charges over the lifetime of the loan, assuming you made minimum payments on the average $5,525 balance, Rossman calculated.

He advised that if you have a high-interest balance, consolidate and pay off the credit cards with lower interest personal loans or home equity loans or to switch to a balance transfer credit card with no interest.

Spatt suggested that consumers who have an adjustable-rate mortgage, or home equity line of credit, may also wish to change to a fixed rate.

A rate hike won't immediately affect homeowners who have longer-term rates on their mortgages, both 30-year and 15 year-term. They are fixed and linked with Treasury yields.

The average interest rate on a 30-year fixed-rate mortgage has risen to 6.28% this week, up more than 3 percentage points from December's 3.11%.

Jacob Channel, senior economist at LendingTree, said that "Given their already gone up so drastically, it's difficult for us to predict just how high mortgage rates will go this year,"

On a $300,000 loan, a 30-year, fixed-rate mortgage would cost you about $1,283 a month at a 3.11% rate. If you paid 6.28% instead, that would cost an extra $570 a month or $6,840 more a year and another $205,319 over the lifetime of the loan, according to Grow's mortgage calculator.

Auto loans are fixed but the payments are increasing because of the rising cost for all cars. This means that if your goal is to finance a brand new car, you will have to spend more in the coming months.

Federal student loan interest rates are fixed. Most borrowers will not feel any immediate impact from a rate rise. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates -- which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.

This is an opportunity to review your current loans and see if refinancing would make sense.

Find higher savings rates

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate. The savings account rates at some of largest retail banks are currently just 0.7%.

McBride stated, "The rates paid to larger banks are largely unchanged. So where you have savings is really important."

Due to lower overhead costs, the average online savings account rate close to 1%. This is much higher than the average rate at a brick-and mortar bank.

McBride stated that "if money is sitting in savings accounts earning 0.05% it's worth moving to savings accounts paying 1 percent. This will provide immediate benefits and additional benefits as interest prices rise."

These high-yielding certificates are more attractive than high-yield savings accounts. They pay approximately 1.5%.

However, as the inflation rate has risen above all other rates, savings can lose their purchasing power over time.

To that end, "one main opportunity out there is the possibility of buying some I bonds from the U.S. government," Spatt said.

These federally backed inflation-protected assets offer the best yield ever and are virtually risk-free.

Even though there are restrictions on how much you can buy and that you cannot tap the funds for more than one calendar year, you'll get a much higher return than a savings plan or a one-year CD.

What's next for interest rates?

Consumers need to be ready for higher interest rates in coming months.

Even though the Fed has already raised rates multiple times this year, more hikes are on the horizon as the central bank grapples with inflation.

The expectations were for quarter-point and half point hikes at each meeting. However, the central bank could grant further 50 to 75 basis points increases if inflation starts to cool.

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