In a matter of months, it’s become more expensive to carry a credit card balance, a car loan or a mortgage as the Federal Reserve’s interest rate hikes have seeped into borrowing costs.
It’s tough medicine that central bankers hope will break the fever of hot inflation — and no one expects the doses to stop any time soon.
Federal Reserve Chairman Jerome Powell and the other members on a key committee announced another increase in the federal funds rate, a touchstone rate all sorts of lenders use to inform their own interest rates.
It started with a 25 basis point increase in March, after rates were near zero to address the pandemic’s early financial shock waves. Then the Fed added another a 50 basis point increase in May. Now comes the single biggest rate hike since 1994.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Powell said in his prepared remarks at the start of Wednesday’s press conference. “From the perspective of today,
either a 50 or 75 basis point increase seems most likely at our next meeting.” But the Fed will take the data as it comes, he added.
The chance of 75 basis point increase became the Wall Street scuttle on the heels of inflation data showing consumer prices increasing faster than expected in May.
The Dow Jones Industrial Average, DJIA, -2.42% the S&P 500 SPX, -3.25% and the Nasdaq Composite COMP, -4.08% all finished sharply up Wednesday. That upward momentum fizzled by the opening bell on Thursday, when the benchmarks gave up the gains, and then some.
On Main Street, these numbers matter for people’s wallets. That’s because they translate into the borrowing costs a person incurs when they use a credit card, buy a car or a home.
Some transactions, like securing a mortgage, aren’t directly influenced by the Fed. But it’s all rate sensitive. And it’s all happening at a time when consumers are getting squeezed by high prices on everything from eggs to airfares as talk of a potential future recession isn’t going away.
Here’s a look at how much Americans’ borrowing costs have increased already and how to be ready for the next rate increase — all while shoring up your finances for whatever financial uncertainty the future holds.
Got credit card debt? Pay it quickly because balances are going to get more costly
Americans had well over $800 billion in outstanding credit card debt during 2022’s first quarter, according to the Federal Reserve Bank of New York. Though that was a $15 billion quarter-to-quarter drop as people paid off their holiday spending sprees, it’s a collective balance that was up $71 billion from 2021’s first quarter.
The first quarter numbers run through March, so they did not reflect the rate hikes taking hold yet. But credit card interest rates are tightly linked to Fed rates and Matt Schulz, chief credit analyst at LendingTree, says he is seeing the initial impacts.
In May, the annual percentage rate (APR) on new credit card offers was 19.90%, up from 19.68% in April and 19.62% in March, according to LendingTree research.
But how much extra borrowing costs does that mean for someone carrying a balance? The most recent Fed data shows consumers who didn’t completely pay their credit card bill each month were facing a 16.17% APR as of February. Supposing a $5,000 balance and $250 monthly payments, that’s $781 in interest paid over the life of the loan, according to Schulz.
Now layer on the two rate hikes that have happened. That’s $826 — $45 extra bucks – in interest over the life of the loan, Schulz said. Add 75 more basis points and the person is paying $872 in interest over time, he said. That’s $91 extra in overall interest that a person is paying compared to February.
“The increases haven’t necessarily rocked too many people’s world,” he said. But if rate hikes of at least 50 basis points keep coming “then people will definitely feel them.”
That’s why it’s important to pay off balances as soon as possible now, or even take steps like asking a credit card issuer for a lower APR, Schulz said.
Some strain is showing: 11.1% of people in a recurring New York Fed survey said there was a chance they might not be able to pay their minimum debt payments over the next three months.
Think hard about big purchases — but do this if you’re going ahead
Serious about getting a car or a home? Lock in the rate as soon as possible, experts have said. In the near future, those numbers are just going to go up.
Auto loans and mortgages don’t have the direct tie to Fed rate hikes that credit cards do, but the rates are influenced by the benchmark rate and the lending environment it creates.
The numbers tell the tale. The current rate on a five-year loan for a new car is 4.53%, according to Bankrate. It was 4.32% around a month ago and 4.22% two months ago, the site said.
There’s a lot that goes into an individual’s actual borrowing costs, said Dawit Kebede, senior economist at the Credit Union National Association, an organization representing the country’s credit unions.
Still, Kebede said, “If we compare the national average interest rate for prime borrowers of a 60-month new auto loan between now and mid-March, consumers will pay extra $677 dollars in interest over the life of the loan.”
May retail sales numbers released Wednesday ahead of the Fed meeting showed a decline for the first time in five months. That’s largely due to softer numbers on car sales, according to the data.
There are also signs the white-hot housing market is cooling. But that doesn’t mean mortgage rates are. Freddie Mac FMCC, -3.57% said a 30-year fixed rate mortgage was 5.23% for the week ending June 9. That’s nearly double the 2.96% rate at the same time a year ago.
In fact, rates on a 30-year fixed-rate mortgage averaged 5.78% for the week ending June 16, Freddie Mac said a day after the Fed announcement. That 55-basis point pop from 5.23% to 5.78% was the biggest one-week increase since 1987, said Sam Khater, Freddie Mac’s chief economist. (One basis point is equal to one hundredth of a percentage point.)
The rising rates add up to heftier monthly mortgage bills. Suppose there’s a $350,000 house, a 20% down payment and a 30-year fixed mortgage with a 5.23% rate. The owners would currently pay $1,542 monthly, according to Zillow Z, -8.72% researchers. That’s compared to the $973 they would have paid a year ago, Zillow said.
Here’s another scenario that might cause someone to act quick — or just try waiting it out. At the end of last year, a 30-year fixed rate mortgage was 3.11%, according to Jacob Channel, LendingTree’s senior economist. A $300,000 loan at that rate would cost $1,283 a month. At 5.23%, that monthly payment is $1,653, Channel said.
A mortgage rate climb to 6% could effectively bar 18 million households from qualifying for a $400,000 mortgage, according to one estimate.
Build a cash cushion using savings accounts with increasingly generous rates
In a time of rising rates and anxiety over potential economic slowdowns, an ounce of silver lining is that savings account yields go up. So the interest payment award becomes a little sweeter on the good idea of socking away cash for a rainy day.
The annual percentage yield (APY) for an online savings account increased to 0.73% in May, up from 0.54% in April and 0.50% in March, according to Ken Tumin, DepositAccounts.com’s founder and editor.
There are signs Americans need all the help and extra bits of cash they can get when it comes to saving in the face of inflation. Seven in 10 people said they needed to dip into their savings to afford rising costs. Meanwhile, personal savings rates are down from 6% at the start of the year and they stand at the lowest levels since September 2008, according to the U.S. Department of Commerce’s Bureau of Economic Analysis.
MarketWatch reporter Aarthi Swaminathan contributed to this report.