In ongoing efforts to combat inflation, the Federal Reserve announced Wednesday another 0.25% interest rate hike. The quarter percentage point increase will bring the fed funds rate to a target range of 5.25%-5.5%, their highest level in more than 22 years.
When the Fed raises interest rates, they increase what’s known as the federal funds rate. Although this is not the same rate consumers pay, the federal funds rate still affects us regular consumers in our everyday life. Here’s what to know about increasing interest rates, and what you can do as a borrower and saver.
How the new interest rate impacts your life
The federal funds rate is designed to set what banks charge each other, but it trickles down to everything from mortgages to student loans. If you’re planning on applying for a credit card, a home, or a car loan any time soon, here’s how the latest interest rate hike will impact your life.
Credit card rates
Although many of us are not vigilant about our credit card’s interest rate, those numbers are at a decade high and will continue to rise. Most credit cards have a variable rate, and they directly follow the direction of the federal funds rate.
When your credit card’s interest rate rises, make sure you have a plan to pay down any credit card debt. And perhaps the easiest way to lower your credit card’s interest rate? Just ask.
Mortgage rates
The higher the mortgage rate, the lower your purchasing power as a homebuyer—impacting how much home you can afford and how high your monthly payments will be.
We explain what a high mortgage rate means for your monthly payment here. For more, you can find out how much the current rate will impact your monthly payments with an online mortgage calculator.
Most types of loans
Auto, student, and many private loans are often fixed. Unfortunately, they’re not immune to the Fed’s latest benchmark. Rising interest rates still lead to a higher average interest rate and even bigger payments down the line.
If you’re planning on buying a car or taking out a student loan any time soon, your best hope is to use a high credit score to hopefully access a lower rate. Check out our guides to boosting a low credit score and maintaining a high one.
The bottom line
While the Fed raised interest rates in an attempt to keep easing inflation, it’s important to be a conscientious borrower and saver. This might mean holding off on taking out a loan on large purchases for the time being, as well as boosting your power as a borrower with a high credit score.
This post was originally published in February 2023, when the Federal Reserve raised the federal funds rate 0.25%, and was updated on July 27, 2023 following another 0.25% hike.