How today’s Fed rate hike will affect your finances

  • Wednesday's quarter-point increase in the federal funds rate may have far-reaching consequences for consumers.
  • Here's a breakdown of what could happen to your student loan tab, savings account, mortgage, car loan and credit card.

With a move to raise the federal funds rate Wednesday, newly appointed Jerome Powell notched his first interest rate increase as Federal Reserve chairman. For the rest of us, the sixth consecutive hike is also significant for changing the terms by which you borrow money and access credit.

With the Fed's latest increase of 25 basis points in the federal funds rate, "the cumulative effect is mounting," said Greg McBride, Bankrate.com's chief financial analyst.

While rising rates help savers, the escalating cost of debt puts pressure on them too. For starters, credit card rates have never been higher, according to Bankrate.

If you're concerned about what this will mean for your own bank account, mortgage loan or credit card — as well as student debt, home equity loan and car payment — here's a breakdown of what could happen.

A merchant slides a credit card for a transaction.
David Paul Morris | Bloomberg | Getty Images
A merchant slides a credit card for a transaction.

Credit cards

Most credit cards have a variable rate, which means there's a direct connection to the Fed's benchmark rate and card holders will feel an immediate pinch.

"Variable rate debt is where you are most susceptible as interest rates rise," McBride said.

The average American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian's annual study on the state of credit and debt in America. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve.

Tacking on a 25-basis-point increase will cost credit card users roughly $1.6 billion in extra finance charges in 2018, according to a WalletHub analysis. Factoring in the five previous rate hikes, credit card users will pay about $8.4 billion more in 2018 than they would have otherwise, WalletHub said.

However, for those with good credit, there are still opportunities to find a better rate or snag a zero-interest balance transfer offer to insulate yourself for a time from further rate hikes and "give yourself a tail wind toward debt repayment," McBride said.

Potential home buyers walk past an 'Open House' sign displayed in the front yard of a property for sale in Columbus, Ohio.
Ty Wright | Bloomberg | Getty Images
Potential home buyers walk past an 'Open House' sign displayed in the front yard of a property for sale in Columbus, Ohio.

Mortgages

The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there's already been a spike since the start of the year.

The average 30-year fixed-rate is now about 4.54 percent — up from 4.15 percent on Jan. 1 and significantly higher than the record low of 3.5 percent in December 2012.

With interest rates rising, adjustable-rate mortgages will certainly be heading higher, too, and those with some types of ARM loans "are sitting ducks for getting another increase," McBride said.

Many homeowners with adjustable-rate home equity lines of credit, which are pegged to the prime rate, also will be affected. But unlike an adjustable-rate mortgage, these loans reset immediately rather than once a year.

For example, a rate increase of 25 basis points would cause borrowers with a $50,000 home equity line of credit to see a $10 to $11 increase in their next monthly payment, according to Mike Kinane, senior vice president of consumer lending at TD Bank.

The Key Auto Mall car dealership in Moline, Illinois.
Daniel Acker | Bloomberg | Getty Images
The Key Auto Mall car dealership in Moline, Illinois.

Auto loans

For those planning on purchasing a new car in the next few months, today's change likely will not have any big material effect on what you pay. A quarter-point difference on a $25,000 loan is $3 a month, according to McBride.

"Nobody is going to have to downsize from the SUV to the compact because of rates going up," he said.

What will affect what kind of car you can afford is checking that your credit is in good shape, negotiating the price of your vehicle and shopping around to secure the best rate on your financing.

Currently, the average five-year new car loan rate is 4.46 percent and the average four-year used car loan rate is 4.98 percent, according to Bankrate.

Customers wait in line for an ATM outside of a Wells Fargo bank branch in Los Angeles.
Patrick T. Fallon | Bloomberg | Getty Images
Customers wait in line for an ATM outside of a Wells Fargo bank branch in Los Angeles.

Savings

Stashing some cash in a savings account has not yielded very much, aside from peace of mind, until recently.

The average interest rate on a savings account is only 0.07 percent, according to the Federal Deposit Insurance Corp. Even with the Fed rate increase, banks may not pass on any of that increase to their customers, which means interest on deposits will remain near rock-bottom.

Banks' terms allow them to be slower to raise rates on savings products than they are on loans and credit cards.

However, you may find significantly higher savings rates by shopping around and switching to an online bank. "Often you can pick up more than a full percentage point that way," McBride said. In fact, top-yielding savings accounts could be as high as 1.85 percent, according to Bankrate.

With a savings rate, or annual percentage yield, of 0.07 percent, a $10,000 deposit earns just $7 after one year. At 1.85 percent, that same deposit would earn $185.

Students on the campus of the University of Washington in Seattle
Mary Knox Merrill | The Christian Science Monitor | Getty Images
Students on the campus of the University of Washington in Seattle

Student loans

While most student borrowers rely on federal student loans, which are fixed, more than 1.4 million students a year use private student loans to bridge the gap between the cost of college and their financial aid and savings.

Private 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.

"If the Fed raises rates four times this year, 25 basis points at a time, borrowers with existing variable-rate loans can expect to see their rates go up by about 1 percent," said Stephen Dash, the CEO of Credible.com, an online marketplace for lenders that offer student loan refinancing.

That makes this a particularly good time identify the loans you have and see if refinancing makes sense, Dash said.

"When the Fed raises rates, we typically see a spike in borrowers looking to refinance their variable-rate student loans at a fixed rate," he said. There are still "opportunities for savings in a rising interest rate environment."