With Interest Rates Climbing Higher, How Will It Affect Consumers?

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Interest rates

With the Federal Reserve raising interest rates again, it could affect what’s in your wallet. The Federal Open Market Committee announced this widely expected ninth increase of the current cycle, raising the benchmark federal funds rate from 2.25% to 2.50%.

Certainly, Fed rates such as these can move the stock market, but how will the interest rate hike affect consumers, that’s the real question many are now wondering. Here’s what you can expect from your interest rates.



Changes in Consumer Interest Rates: Credit Cards

First of all, some consumer interest rates can be expected to increase immediately as a result of their being tied directly to federal funds rate. Credit cards will most definitely be affected; card interest rates are already variable, and they are tied directly to the federal funds rate movement.

More specifically, credit rates are generally based on the US prime rate, which is based on the federal funds rate. This means you can expect the same amount of interest hike on your credit cards. For example, if you are paying 18.25%, you can expect your annual percentage rate (APR) to jump to 18.50% due to the rate hike.

Basically, for credit card holders, this amounts to two and half billion dollars in additional interest payments every year. This number was determined by analysts at a credit card website by basing it on the current average APR and how much those who carry a balance pay in interest. With cardholders in debt to the tune of one trillion dollars, the twenty-five point price hike will collectively add another two and a half billion dollars in combined payments.

Analysts speak out saying this next year is a good year for Americans focusing on wiping out their credit card debt. As rates get higher, it only makes paying them off take longer and become much more expensive. For those who are already struggling with debt and barely making it, this could be a lot of trouble. At least cardholders should consider refinancing, consolidation, or transferring debt to a card with a lower interest rate.

HELOCs and Other Consumer Debt

Another area where changes in consumer interest rates will most likely be affected is home equity lines of credit or HELOCs. Again, these rates are usually variable and are also tied to the US prime rate, which was 5.25% before the rate hike. It will now rise to 5.50%. This means if your HELOC interest rate is “prime plus one,” it would have previously been 6.25% and soon will increase to 6.50%.

In addition, there are a variety of other forms of consumer debt that also have variable interest rates and are either tied directly into the federal rates fund or the US prime rate. These interest rates can also expect to rise as well.

Other Consumer Interest Rates

Many consumer interest rates are not tied to the federal funds rate or US prime rate, and these rates may not be affected. However, consumer rates typically move the same way, but there are some that may not change, such as interest rates for mortgages, auto loans, and savings accounts yields.

Again, the latest Fed’s interest rate hike can be expected to raise some consumer rates as well, making it more expensive than ever to borrow money. Nonetheless, not all interest rates will react the same. Some will rise immediately, such as credit card interest rates, but some may not move at all.

When and Why This Will Happen So Soon

Consumers generally see a change when the Fed rate goes up without sixty days or two billing cycles. Although credit card issuers are required by federal law to notify consumers of various rates of increase, they are not required to do so when the increase is the result of a Fed rate hike.



Because credit card interest rates are both variable and tied to the prime rate, its index is only a few percentage points above the federal funds rate. Additionally, it is the benchmark by which most banks set theirinterest rates for credit cards and HELOCs. If the federal funds rate goes up, so does the prime rate.

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