Here’s What Fed Rate Hike Means For Your Wallet

The Federal Reserve’s Wednesday interest-rate hike could make carrying credit-card balances and taking out some new loans more expensive, while potentially delivering slightly higher returns to savers.

A quarter-point increase will lift the Fed’s target rate to 3.75% to 4%, but the effects would not reach every household bill at the same speed. Variable-rate debt tends to respond first, while mortgage and auto rates depend on other factors including Treasury yields, lender competition and borrowers’ credit profiles.

The federal funds rate is the overnight rate banks charge one another, not a rate consumers pay directly. Banks nevertheless use changes in the Fed’s benchmark as a basis for other borrowing costs, allowing a rate hike to filter into household finances.

Credit cards and home-equity lines

Credit-card borrowers would likely feel the effects quickly. Most cards carry variable annual percentage rates tied to the prime rate, which banks commonly adjust following changes in the federal funds rate.

The average rate on credit-card accounts that incurred interest was 22.15% in May, according to the Fed’s consumer-credit data. A quarter-point increase would add roughly $25 in annual interest on a $10,000 balance if a lender passed through the full increase and the borrower made no principal payments.

Home-equity lines of credit also commonly carry variable rates, meaning existing borrowers could see payments increase after their next reset. Existing fixed-rate personal loans would not change, though rates on newly issued loans could rise.

Mortgages

Homebuyers should not expect mortgage rates to increase by exactly a quarter point.

Thirty-year fixed mortgage rates are influenced more heavily by longer-term bond yields, particularly the 10-year Treasury, and can move before the Fed acts as investors adjust expectations for inflation and monetary policy.

The average 30-year fixed mortgage stood at 6.76% on Sept. 10, up from 6.71% the previous week, according to Freddie Mac. Adjustable-rate mortgages can respond more directly to changes in interest rates after their introductory periods end, depending on the terms of the loan.

Auto loans and other borrowing

Rates on new auto and personal loans could also move higher, although borrowers’ credit scores, loan terms and competition among lenders can significantly affect the rate consumers ultimately pay.

Commercial banks charged an average 7.14% on 60-month new-car loans and 11.86% on 24-month personal loans in May, according to Fed data. Existing fixed-rate auto and personal loans would not be affected by the Fed’s decision.

Savings accounts and certificates of deposit

A rate hike could provide an upside for savers.

Banks and money-market funds may increase yields on high-yield savings accounts, certificates of deposit and other short-term products, although banks do not have to pass the Fed’s full increase to depositors. Treasury-bill yields also tend to respond closely to expectations for the Fed’s near-term interest-rate path.

What consumers should watch

For household finances, Wednesday’s decision could matter less than what Fed Chairman Kevin Warsh signals about the path of interest rates in the months ahead.

A single quarter-point increase would produce relatively modest changes for many borrowers, but additional hikes would compound the effect on variable-rate debt and new borrowing while potentially keeping short-term savings yields elevated.

Consumers carrying credit-card balances can limit the impact by paying down principal or moving debt to lower-rate products. Borrowers should also check whether their loans carry fixed or variable rates before assuming a Fed hike will change their monthly payments.