By raising interest rates, the Fed is attempting to cool the economy and inflation contained, which remained higher than expected in August. Higher interest rates increase the cost of maintaining credit card balances and borrowing on mortgages, car loans and other debt, but consumers may not feel the effects immediately. Even outsized hikes like the recent central bank hikes hit wallets and the economy in general somewhat gradually over weeks and months, economists say.
“There’s no easy answer to when it starts pinching,” said Caroline Fohlin, an economist at Emory University. “It acts like a vise, tightening more and more.”
To put the rate hikes into context, it helps to look at the actual impact that higher interest rates have had on Americans’ monthly spending on credit cards and other debt since the Fed began those efforts six months ago.
Increasing rates increase your credit card bills
The average APR on a credit card rose from around 16.17% in early March to over 18% in September, according to Bankrate on interest rate hikes. Since the average household has $8,942 in balances, according to WalletHub, that translates to about $14 in additional interest every month.
Those numbers may seem small, said Nina O’Neal, partner and investment advisor at AIM Advisors, but the relatively rapid rate of increase can be creepy.
Higher mortgage rates make homes less affordable
The change in the cost of borrowing to buy a home was more pronounced in an already expensive housing market. Before the Fed’s move, the average fixed rate on 30-year mortgages recently rose to 6.02% from 4.16% in the week of March 17, and additional rate hikes would likely push mortgage rates even higher.
Rising interest rates can add hundreds of dollars to a monthly mortgage payment. According to data from the National Association of Realtors, the median home price reached $403,800 in July. Someone putting a 20% down payment on such a home and taking out a 30-year mortgage with an interest rate of 6% is now paying about $2,400 a month. If they made the same purchase six months ago, their monthly payments would be almost $250 less.
A new car comes with an additional shock sticker
Americans are also paying more than ever to fund new auto loans. If you want to buy a new car now, you should check the offered interest rate carefully. Individual merchants and lenders may charge different amounts for a new loan, but the average APR on a five-year loan has risen steadily over the past six months from 3.98% to 5.07%, according to Bankrate. As the median price of a new car gets closer to $50,000, borrowers are paying about $25 more each month.
Savings accounts generate slightly more interest
In years past, one benefit of higher interest rates has been better interest rates on savings accounts. But interest rates on savings tend to rise much more slowly than those on loans because banks don’t have much competition for deposits.
“Savers somehow get a raw deal,” said Prof. Fohlin. “That high-yield savings isn’t what it used to be, so you’re not getting as much interest and you’re certainly not keeping up with inflation.”
Still, an increase in interest rates can mean a slightly better return on your savings. Six months ago, he held $1,000 in a Goldman Sachs account‘s
For example, Marcus said you would get 0.5% net interest. Now the same account offers an annual percentage return of 1.9%, meaning savers earn an additional $14 in interest over a year, versus the $5 in interest earned at the previous rate.
budget trade-offs to consider
The frequency and scale of Fed hikes make it harder for consumers to make decisions about borrowing and saving, said Yiming Ma, an assistant professor of finance at Columbia University. “Knowing your interest rate is now even more important than it used to be, both when you put money in the bank and when you take out a loan,” she said.
The bigger picture could mean tightening your financial plan or reassessing your monetary goals given the combined effect of these rate hikes, Prof Fohlin said. For those looking to get a new mortgage, this could mean, for example, choosing a smaller house, postponing house hunting, or considering other mortgage products with lower interest rates.
Authors: Julia Carpenter at firstname.lastname@example.org
Corrections & Enhancements
The typical monthly payment on a new car loan has increased by $25 in the last six months. A previous version of this article incorrectly said it was up $10. (Corrected September 22.)
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