As the Federal Reserve raises interest rates in an effort to slow inflation, many are wondering, how do higher interest rates affect me? The truth is that everyone, whether you have good credit or bad credit, will be impacted by the recent Fed Reserve rate hikes.
As uncertainties mount regarding what direction the economy is going, now, more than ever, it’s important to understand how changes to the Federal interest rate will affect you. Here, we’ll discuss some of the ways higher interest rates will change the way consumers handle their money.
The Trickle-Down Effect
The rate controlled by the Federal Reserve dictates the amount of interest banks charge one another for lending. This, in turn, dictates how much a commercial bank will charge its customers for a variety of loans. Everything from mortgages and auto loans to personal loans and credit cards is impacted. The bank will use the Federal Reserve rate as a point of reference to determine the rates they charge consumers to borrow money. An interest rate hike of 1% can significantly alter the interest paid when borrowing money from a financial institution.
A Reduction in Discretionary Spending
As one would expect, when interest rates rise, consumers are less likely to spend money. Rate hikes directly impact how much individuals can afford to spend on large purchases like a home or automobile. Historically, discretionary spending also decreases as consumers watch how much they pay for nonessential services like restaurants, vacations, and other luxury items.
Variable Interest Rates and New Loans
Individuals applying for a new loan and those who currently have loans with variable interest rates, such as adjustable-rate mortgages, should expect to pay more when the Federal Reserve raises interest rates. Additionally, credit cards and home equity lines of credit (HELOCs) are also directly affected by rate hikes.
If you’re looking for a new home or currently have a variable-rate mortgage, it’s very important to stay informed about any potential changes to the Federal interest rate. If interest rates continue to rise, consumers may not have the resources needed to make new large purchases or continue paying for an existing loan with a variable rate.
How Are Credit Cards Affected By the Federal Interest Rate?
As previously mentioned, the interest rate of credit cards is directly influenced by Federal rate hikes. Consumers who carry significant credit card debt should pay close attention to any rate hikes and adjust their budgets accordingly. An increase in interest rates could mean you’ll be spending a lot more money for any balance you currently have.
Save More, Spend Less
Higher interest rates aren’t always a bad thing. When it comes to saving money, the interest paid on savings accounts, money market accounts, and other deposits also increases. This encourages people to save more money rather than spend it. Make sure to check with your bank on how fluctuations in interest rates impact both borrowing and saving with their institution.
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