How the Fed’s Rate Increase Will Impact Your Personal Finances

Frustrated couple checking bills at home using laptop.
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The Federal Reserve Board of Governors raised key interest rates 0.25% points on March 16 for the first time in three years, just as Russia’s widely condemned invasion of Ukraine upset global energy markets already weakened by the COVID-19 pandemic. 

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In context, the benchmark interest rate increase comes only two years after the central bank slashed rates to near-zero to ease the economic pain caused by the COVID-19 pandemic. 

On the national interest level, a healthy understanding of how rate increases will impact the economic future sectors is good to know. But knowing how these rate hikes will impact your own financial outlook and guide personal plans of action is downright important.

Everyone is experiencing the effects of soaring housing, food and energy prices and will continue to see those rise and fluctuate. But how will the Fed rate hike affect your personal finances on things like credit cards, mortgages, lines of credit and savings accounts? Let’s take a look.

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Credit Cards

As far as your credit cards are concerned, expect to see an influx of friendly e-mailouts and texts to your inboxes and phones over the next while because the new rate increases will affect your beloved plastics. According to CreditCards.com, credit cards average for the week of March 9 is 16.17% with an overall average hovering around 16%. Reward credit cards run a bit higher at a 17.51% average — up from 16.99% just a month ago. These will increase once the Fed announcement is made.

Mortgages and Home Equity Lines of Credit

Both adjustable- and fixed-rate mortgages, and home equity lines of credit (HELOC), will be affected by the benchmark rate hike, but only slightly. Adjustable-rate mortgages are modified after the first fixed-rate period ends (normally after five years). If that fixed period has stopped, expect to pay an additional $187 per month on a $300,000 adjustable mortgage, at the end of a year of five 0.25%-point Fed raises. The expected rate increase is a short-term borrowing strategy, and a fixed mortgage is a long-term financial project, so these rates won’t cause too much of a financial burden in the here and now. But the current fixed mortgage rate rose approximately one significant percentage point since November and currently sits right around 3.85%, according to home loan mortgages experts Freddie Mac. Accordingly, payment on a $300,000 mortgage will be around $1,719.   

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For home equity lines of credit, you should expect to pay an additional $6.00 per month from the quarter-point increase on a $30,000 line of credit at the average 3.96% average rate. 

Source: Federal Reserve Board of Governors March 2022

Auto Loans

Now isn’t the best time to buy a car as prices have increased considerably over the past year due to supply chain disruptions. But existing car loans won’t be affected greatly, you could perhaps see a $3.00 increase in your monthly payment increase on a car valued at $25,000. 

Savings Accounts and CDs

Considering how small savings and CD rates are right now (hovering around 0.06% and 0.14% respectively) and how slow deposits respond to interest rate raises, the Fed rate increase shouldn’t benefit savers much. A keener eye should be kept on online banks, however, as they are trickier to predict due to their fluctuating and competitive nature.  

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What Can You Do?

For credit card hoarders, now might be a good time to pay off debt or consolidate it into a loan with lower fixed monthly rates. You could play the balance transfer game as well, if you can find an option that will have you paying 0% interest while you pay off the balance. Locking into rates for mortgages and auto loans make alleviate financial stress before rates increase to an uncomfortable or unpayable level. As always, bolstering any possible emergency funds would be a smart idea now too.

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Find: 10 Hidden Costs of Buying a House

At first glance, a lot of these financial impacts don’t seem too costly at all. But continuing increases in gas, groceries and rent, coupled with any additional money out of your pocket and into the bank, will hit most people harder than they think, especially for those already struggling with their finances due to the pandemic.  

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry.
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