As the Federal Reserve has lifted its key interest rate several times over the past year, Americans have seen the effects on both sides of the household ledger: Savers benefit from higher yields, but borrowers pay more.
Here’s how it works:
Credit card rates are closely linked to the Fed’s actions, so consumers with revolving debt can expect to see those rates rise, usually within one or two billing cycles. The average credit card rate was 19.9 percent as of Jan. 25, according to Bankrate.com, up from around 16 percent in March last year, when the Fed began its series of rate increases.
Car loans tend to track the five-year Treasury note, which is influenced by the Fed’s key rate — but that’s not the only factor that determines how much you’ll pay.
A borrower’s credit history, the type of vehicle, loan term and down payment are all baked into that rate calculation. The average interest rate on new-car loans was 6.5 percent in the fourth quarter last year, according to Edmunds, up from 4.1 percent in the same period a year earlier.
Whether the rate increase will affect your student loan payments depends on the type of loan you have.
The rate for current federal student loan borrowers — many of whom will see up to $20,000 in loans canceled under a Department of Education program, subject to legal challenges — isn’t affected because those loans carry a fixed rate set by the government.
But new batches of federal loans are priced each July, based on the 10-year Treasury bond auction in May. Rates on those loans have already jumped: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed the year-earlier period.
Borrowers of private student loans should also expect to pay more: Both fixed- and variable-rate loans are linked to benchmarks that track the federal funds rate. Those increases usually show up within a month.
Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead generally track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to all of it.
After climbing above 7 percent in November, for the first time since 2002, mortgage rates had fallen to 6.13 percent in the week through Jan. 26, according to Freddie Mac. The average rate for an identical loan was 3.55 percent the same week in 2021.
Other home loans are more closely tethered to the Fed’s move. Home equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the Fed’s rates.
Savers seeking a better return on their money will have an easier time — yields have been rising, but not uniformly.
An increase in the Fed’s key rate often means banks will pay more interest on their deposits, though it doesn’t always happen right away. They tend to raise their rates when they want to bring more money in — many banks already had plenty of deposits, but that may be changing at some institutions.
Primis Bank, for example, recently introduced online savings and checking accounts with a 5.03 percent rate. But rates at many of the larger online banks — including Ally, American Express, Capital One, Discover and Marcus — were still 3.3 percent, according to Ken Tumin, founder of DepositAccounts.com, part of LendingTree.
“I expect some more upward movement after today’s Fed rate hike,” Mr. Tumin said, “but it appears online banks are generally not in a rush to hike their deposit rates now.”
Rates on certificates of deposit, which tend to track similarly dated Treasury securities, have been ticking higher. The average one-year C.D. at online banks was 4.4 percent at the start of January, up from 0.5 percent a year earlier, according to DepositAccounts.com.