Here’s where the Fed’s new rate hike will hit you hardest and what you can do about it
After lowering interest rates to stimulate spending during the pandemic, the Federal Reserve would love for you to stop now – at least until inflation is under control.
The Fed increased the federal funds rate 75 basis points for the second month in a row, making it the fourth rate hike since March.
The benchmark interest rate is now between 2.25% and 2.5%, which isn’t bad. But banks and lenders then add their interest rates, which is when your credit starts to get expensive.
“When the price of peanut butter goes up, it’s bad for jelly sales — so if the price of credit goes up, it’s bad for things where people typically rely on credit to get it,” says Mark Witte, professor of economics education at Northwestern University. “Housing, cars, things of that nature.”
But there are ways to cut your costs even when they seem out of your control.
If your retirement plans have been turned upside down by inflation, here’s an easy way to help get back on track
A TikToker paid off $17,000 in credit card debt in ‘stuff of money’ — can it work for you?
Too many Americans still miss cheaper car insurance
Before Wednesday’s rate hike, the average 30-year fixed-rate mortgage was 5.5%almost double what it was at the same time last year.
If you already own a home and have a fixed rate mortgage, the increase will not affect you immediately. But if you have a variable rate, you can see a difference. And if you’re looking to buy now, you’ve already lost a significant amount of buying power.
“For every percentage increase in the rate, there are about half a million fewer people qualifying for a home,” says John Mallett, president of Main Street Mortgage, a mortgage broker in Ventura County, Inc. California.
But all hope is not lost.
“It’s starting to become an equalized market where supply tends towards meeting demand,” says Mallet.
This gives a potential buyer more options.
“It is possible that people may, when making an offer for a home, ask the seller to pay $10,000 in closing costs which will be used to buy out the rate. You can therefore buy back rates. And it will be easier for them to qualify for funding.
Mallett suggests considering a temporary rate buyout, which allows the buyer to pay a lower interest rate for the first two years before it hits the regular rate.
A buyer and seller can pay for the buyout and it can be a lump sum payment using mortgage points. One Mortgage Point equals 1% of your total loan amount. So, for example, on a $100,000 loan, one point would be $1,000. Sellers will sometimes use it to induce a sale.
If you already own a home and have a home equity line of credit, these rates will be affected by the Fed increase.
Americans have a lot of credit card debt – more $840 billion the penalty. And when the federal funds rate goes up, the interest on that debt also goes up.
The median credit card interest rate in July before the Fed’s rate hike was [20.8%](https://www.lendingtree.com/credit-cards/average-credit-card-interest-rate-in-america/.
It’s becoming increasingly important to pay off your credit card balance, says Jim Droske, president of Illinois Credit Services, a credit counseling service outside of Chicago.
“It’s not always realistic for people,” he says. “But if they can, they should pay it back so there’s no balance to charge interest on.”
Another option is to call your credit card company and ask for a rate reduction, Droske says. “Sometimes these companies just don’t talk about it. But if you ask, sometimes they’ll give you a better program.
Your car loans will not escape the rise in rates either. In the first quarter of 2022, the national average rate for a 60-month car loan was 4.07%, according to Experian), and it will increase slightly with the Fed’s announcement.
To get the best rate on a car loan, you need to shop around and check with several financiers, but Droske says a decent credit score is key.
“Your credit is extremely important when you take out a car loan,” he says. “Just because you’re approved for a loan doesn’t mean [it has] good conditions, and they can be everywhere – I mean, you could pay 19%, you could pay 9%”.
What you end up paying largely depends on your credit score, he says. So while the benchmark interest rate will affect what you pay, how you’ve managed your credit will have a huge impact on your rate.
Better credit will go a long way here
The good news is that you can do a lot to clean up your credit score.
“In an interest rate-based financial world, credit is king,” says Droske.
He says you should check your credit score for any discrepancies or errors or medical debt that has not yet been removed. You should also pay off your credit balances as much as possible and see if you can get a higher credit limit.
But the best advice right now, might be the simplest.
“If you don’t need it, don’t buy it right away,” says Droske. “People tend to go out and buy cars sometimes when they don’t need them and all of those things are very expensive right now.”
What to read next
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.