What does the Fed's rate increase mean for you?
The Federal Reserve raised its key rate by a quarter point to 5.0%, reaching its highest level in 15 years, as part of efforts to curb inflation by making borrowing more expensive.
Consumer prices have increased more than 6% on a year-over-year basis every month since October 2021 versus their historical inflation target ~2%.
While it may lead to increased interest for savings, it will also make borrowing for homes, autos, and other purchases more expensive.
The rise comes at a time when credit card debt is at a record high.
What does this all mean and how does it effect you?
The Fed’s rate forms the basis for your bank’s “prime rate” which helps determine the Annual Percentage Rate (APR) on your credit card. If you have a balance, the increase in APR by 0.25% could cost you more money and time to pay off your debt.
For example, if you have a $4,000 credit balance and your interest rate is 20%, if you only make a fixed payment of $110 per month, it would take you a bit under five years to pay off your credit card debt and you would pay ~$2,200 in interest.
If your APR increases by a percentage point, paying off your balance would take two months longer and cost an additional $215.
Signing up for a zero percent interest or low interest balance transfer promotion, taking a low-rate personal loan, or pursuing a debt management plan offered by a reputable nonprofit credit counseling agency can help to reduce credit card debt (click here).
Reducing credit card debt can also be done by adding at least $10 above the minimum payment of your credit card with the highest interest rate or paying 10% more than the minimum payment per month.
The “debt snowball” method, where debts are paid off from smallest to largest, is another way to tackle debt.
The Federal Reserve's Interest Rate Hike Was a Surprise to Some
This is the Fed's ninth rate hike over the past year and the rate is the highest rate since 2007.
The increase comes amid a string of recent bank failures, the most high-profile of which was Silicon Valley Bank.
Among other drivers, the institution purchased large amounts of US government bonds that traded at a discount as interest rates rose, leading to a liquidity crunch and, ultimately, a bank run.
The benchmark rate set by the Fed has a significant impact on the cost of borrowing for consumers, affecting everything from purchasing cars and homes to starting new businesses.
See how the federal funds rate affects the broader economy here.
And if you need help with your debt load, start here.
