Tag: Credit card debt

The Federal Reserve raised the target federal funds rate for the eighth time in a row on Wednesday, in its continued effort to tame persistent inflation.

At its latest meeting, the central bank approved a more modest 0.25 percentage point increase after recent signs that inflationary pressures have started to cool.

“The easing of inflation pressures is evident, but this doesn’t mean the Federal Reserve’s job is done,” said Greg McBride, chief financial analyst at Bankrate.com. “There is still a long way to go to get to 2% inflation.”

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and your credit card rate follows suit within one or two billing cycles.

“Credit card interest rates are already as high as they’ve been in decades,” said Matt Schulz, chief credit analyst at LendingTree. “While the Fed is taking its foot off the gas a bit when it comes to raising rates, credit card APRs almost certainly will keep climbing for at least the next few months, so it is important that cardholders continue to focus on knocking down their debt.”

Credit card annual percentage rates are now near 20%, on average, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders carry debt from month to month while paying sky-high interest charges — “that’s a bad combination,” McBride said.

Altogether, this rate hike will cost credit card users at least an additional $1.6 billion in interest charges in 2023, according to a separate analysis by WalletHub.

“A 0% balance transfer credit card remains one of the best weapons Americans have in the battle against credit card debt,” Schulz advised.

Otherwise, consumers should consolidate and pay off high-interest credit cards with a lower-interest personal loan, he said. “The rates on new personal loan offers have climbed recently as well, but if you have good credit, you may be able to find options that feature lower rates that what you currently have on your credit card.”

2. Mortgage rates will stay higher

Rates on 15-year and 30-year mortgages are fixed and tied to Treasury yields and the economy. As economic growth has slowed, these rates have started to come down but are still at a 10-year high, according to Jacob Channel, senior economist at LendingTree.

The average interest rate for a 30-year fixed-rate mortgage is now around 6.4% — up almost 3 full percentage points from 3.55% a year ago.

“Relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel said.

“We’re still a ways away from the housing market being truly affordable, even if it has recently become a bit less expensive,” Channel said.

Other home loans are more closely tied to the Fed’s actions. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.

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3. Auto loans will get more expensive

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans, so if you are planning to buy a car, you’ll shell out more in the months ahead.

The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% last year.

The Fed’s latest move could push up the average interest rate even higher, although consumers with higher credit scores may be able to secure better loan terms or look to some used car models for better deals.

“The ever-increasing costs of financing remain a challenge,” said Ivan Drury, Edmunds’ director of insights.

4. Some student loans will get pricier

Federal student loan rates are also fixed, so most borrowers won’t be affected immediately. But if you are about to borrow money for college, the interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and any loans disbursed after July 1 will likely be even higher.

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 central bank raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.

For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate, and the savings account rates at some of the largest retail banks, which have been near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.

Also, thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank.

Rates on one-year certificates of deposit at online banks are even higher, now around 4.75%, according to DepositAccounts.com.

As the Fed continues its rate-hiking cycle, these yields will continue to rise, as well. However, you have to shop around to take advantage of them, according to Yiming Ma, an assistant finance professor at Columbia University Business School.

“If you haven’t already, it’s really important to benefit from the high interest environment by getting a higher return,” she said.

Still, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time. 

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The Federal Reserve raised its target federal funds rate by 0.5 percentage points at the end of its two-day meeting Wednesday in a continued effort to cool inflation.

Although this marks a more typical hike compared to the super-size 0.75 percentage point moves at each of the last four meetings, the central bank is far from finished, according to Greg McBride, chief financial analyst at Bankrate.com.

“The months ahead will see the Fed raising interest rates at a more customary pace,” McBride said.

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The latest move is only one part of a rate-hiking cycle, which aims to bring down inflation without tipping the economy into a recession, as some feared would have happened already.

“I thought we would be in the midst of a recession at this point, and we’re not,” said Laura Veldkamp, a professor of finance and economics at Columbia University Business School.

“Every single time since World War II the Federal Reserve has acted to reduce inflation, unemployment has shot up, and we are not seeing that this time, and that’s what stands out,” she said. “I couldn’t really imagine a better scenario.”

Still, the combination of higher rates and inflation has hit household budgets particularly hard.

Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark, so short-term borrowing rates are already heading higher.

Credit card annual percentage rates are now over 19%, on average, up from 16.3% at the beginning of the year, according to Bankrate.

If you’re carrying a balance, “grab one of the zero-percent or low-rate balance transfer offers,” McBride advised. Cards offering 15, 18 and even 21 months with no interest on transferred balances are still widely available, he said.

“This gives you a tailwind to get the debt paid off and shields you from the effect of additional rate hikes still to come.”

Otherwise, try consolidating and paying off high-interest credit cards with a lower interest home equity loan or personal loan.

Consumers with an adjustable-rate mortgage or home equity lines of credit may also want to switch to a fixed rate. 

Because longer-term 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the broader economy, those homeowners won’t be immediately impacted by a rate hike.

However, the average interest rate for a 30-year fixed-rate mortgage is around 6.33% this week — up more than 3 full percentage points from 3.11% a year ago.

“These relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” said Jacob Channel, senior economic analyst at LendingTree.

Anyone planning to finance a new car will also shell out more in the months ahead. Even though auto loans are fixed, payments are similarly getting bigger because interest rates are rising.

The average monthly payment jumped above $700 in November compared to $657 earlier in the year, despite the average amount financed and average loan term lengths staying more or less the same, according to data from Edmunds.

“Just as the industry is starting to see inventory levels get to a better place so that shoppers can actually find the vehicles they’re looking for, interest rates have risen to the point where more consumers are facing monthly payments that they likely cannot afford,” said Ivan Drury, Edmunds’ director of insights. 

Federal student loan rates are also fixed, so most borrowers won’t be impacted immediately by a rate hike. 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.

That makes this a particularly good time to identify the loans you have outstanding and see if refinancing makes sense.

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate, and the savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.24%, on average.

Thanks, in part, to lower overhead expenses, the average online savings account rate is closer to 4%, much higher than the average rate from a traditional, brick-and-mortar bank.

“The good news is savers are seeing the best returns in 14 years, if they are shopping around,” McBride said.

Top-yielding certificates of deposit, which pay between 4% and 5%, are even better than a high-yield savings account.

And yet, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time. 

Recent data show that these moves are starting to take affect, including a better-than-expected consumer prices report for November. However, inflation remains well above the Fed’s 2% target.

“They will still be raising interest rates now and into 2023,” McBride said. “The ultimate stopping point is unknown, as is how long rates will stay at that eventual destination.”

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Correction: A previous version of this story misstated the extent of previous rate hikes.