How Fed's bigger, faster rate hikes will affect your credit card, mortgage, savings rates

  • The Fed raised its key short-term rate from near zero by a quarter percentage point in March.
  • On Wednesday, the central bank is set to push it up another half point, its largest bump in 22 years.
  • The move will drive rates higher on everything from credit cards to mortgages.

Just six weeks ago, Americans were facing sharply higher borrowing costs as the Federal Reserve launched an aggressive campaign of interest rate hikes to curb soaring inflation.

Now the Fed is putting those rate increases on steroids, and consumers will have to dig even deeper into their wallets to pay off loans.

After raising its key short-term interest rate from near zero by a quarter-percentage-point in March, the Fed on Wednesday pushed it up another half-point, its largest bump in 22 years. The move will drive rates higher on everything from credit cards to mortgages.

“It means your debt is going to get a lot more expensive in a hurry,” says Matt Schulz, chief credit analyst at Lending Tree.

And that’s just the beginning.

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Condominium units are offered for sale in the Dorchester neighborhood, Wednesday, Aug. 18, 2021, in Boston.  Americans who for years have enjoyed the benefits of historically low interest rates will have to adapt to a very different environment as the Federal Reserve embarks on what's expected to be a prolonged period of rate hikes to fight inflation.

How many interest rate hikes expected in 2022?

Powell said two more half-point rate increases will be "on the table" in June and July, after which economists expect quarter-point increases the rest of the year. If the Fed follows through, that would amount to a total of 2.5 percentage points in rate increases this year, the most since 1994, leaving the benchmark rate at a range of 2.5% to 2.75% by the end of 2022.

Economist Ian Shepherdson of Pantheon Macroeconomics thinks it's likely the Fed downshifts to quarter point rate increases after the June hike as inflation eases. 

“It’s really the cumulative effects of all these increases” that will pinch borrowers, Schulz says.

On the bright side, consumers, especially seniors and others on fixed incomes, will finally see bank deposit rates rise from paltry levels, especially for online savings accounts and CDs.

What is the inflation rate in 2022?

Fed policymakers have felt an urgency to act more swiftly after the consumer price index reached a 40-year high of 8.6% in March. The Fed had held its federal funds rate near zero for two years to make borrowing cheaper and encourage spending to help lift the economy out of a COVID-19-induced recession.

But the Fed now finds itself in a delicate position: It must raise rates to cool spending and inflation without tipping the economy into recession. 

Wednesday’s rate increase will have the biggest impact on credit cards, adjustable rate mortgages and home equity lines of credit. All are directly affected by Fed moves.

Americans with 30-year mortgages are already feeling the effects, because most of this year’s projected Fed increases are figured into mortgage rates. Car buyers will be nicked, but less dramatically.

Federal Reserve Bank in Washington.

“Rising interest rates mean borrowing costs more, and eventually saving will earn more,” says Greg McBride, Bankrate’s chief financial analyst. “This hints at the steps households should be taking to stabilize their finances – pay down debt, especially costly credit card and other variable-rate debt, and boost emergency savings.”

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How rising rates affect credit cards, adjustable mortgages, HELOCs?

Credit cards, adjustable rate mortgages and home equity lines of credit (HELOCs) will become pricier within one or two months. That's because they’re tied to the prime rate, which in turn is linked to the Fed’s benchmark rate. In other words, a Fed half-point increase is largely passed along.  

Credit card rates are averaging 16.4%, according to Bankrate.com. For a $5,000 credit card balance, a half-point increase probably will add $193 in total interest for borrowers who make the minimum monthly payment, says Ted Rossman, a senior industry analyst at Bankrate.

A total of 2 percentage points in rate increases the rest of the year would add $800 in interest until the balance is paid off, Rossman says.

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Schulz says consumers with good credit can qualify for a balance transfer card that charges zero interest for a year or more. Consolidating debts into a personal loan with a lower fixed monthly rate is also a good option, he says.

The average rate for a home equity line of credit is 4.15%, Rossman says. A half-point increase on a $50,000 credit line raises the minimum monthly payment by $21, he says. A 2-percentage-point increase the rest of the year would result in an $83 increase in the monthly tab.

By contrast, adjustable rate mortgages are modified once a year after the fixed-rate period ends, typically after five years. The effect thus will be delayed, but then it could sting. An ARM whose rate rises from 3.85% to 5.85% the rest of this year would increase the monthly payment on a $300,000 adjustable rate mortgage by $363, Rossman says.

Are home interest rates going up?

Thirty-year fixed rate mortgages trace movements in the 10-year Treasury note and are affected by the Fed’s key short-term rate only indirectly. The outlook for the economy and inflation are also big factors.

Homeowners with existing fixed rate mortgages won’t see any changes. But recent and prospective homebuyers are being socked by higher rates that take into account projected Fed increases through much of 2022.

The average 30-year fixed rate is at 5.1%, according to Freddie Mac, up from 3.11% late last year. That has raised the typical monthly principal and interest payment on a $300,000 mortgage by $346 to $1,628, according to Bankrate’s mortgage calculator.

As the Fed follows through and boosts rates, mortgage rates could rise further, perhaps to 6%, Rossman says. That would lift the monthly mortgage bill by another $170 to $1,798.

“Homebuying has become more difficult for many in the market,” says Lending Tree senior economic analyst Jacob Channel. A silver lining, he says, is that it should cool demand for homes, slowing torrid price growth and providing buyers more options and some relief from bidding wars.

How does Fed affect auto loans?

A half-point Fed rate increase Wednesday should make its way to new auto loans, but the toll should be less painful. The monthly payment for a $25,000, five-year new-car loan car would rise by about $6 a month, Rossman says.

And if average car loan rates rise from the current 4.47% to 6.47% by year’s end, the monthly bill would increase by about $23, he says.

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How does Fed affect bank savings interest rates?

As Fed rates rise, banks will be able to charge a little more for loans, giving them more profit margin to pay a higher rate on customer deposits.

Don’t expect a fast or equivalent increase on most savings account and CD rates, says Ken Tumin, founder of DepositAccounts.com.

Since the pandemic, banks have been flush with deposits, and demand for loans has been weak because of the COVID-19-related downturn, Tumin says. In other words, most brick-and-mortar banks don't really need your money.

The average savings rate is a minuscule 0.06%, Tumin says, even after the Fed's March increase. The average one-year CD inched up after the Fed’s move, but it’s barely noticeable – from 0.14% to 0.17%, Tumin says. Those probably won’t budge much after the Fed acts Wednesday.

“Most of the action will be with online banks," Tumin says. They have lower costs and face more intense competition since consumers can more easily transfer their money from one online bank to another, he says.

The average online savings rate has risen 0.5% to 0.54% since the Fed’s March rate increase, he says. And the typical online one-year CD has jumped from 0.67% to 1%, Tumin says.

For CDs, online banks are anticipating future Fed moves and trying to coax consumers into locking in a relatively high CD rate that will still be a bargain for the bank after the flurry of Fed increases.

Rates on five-year CDs have climbed even more sharply, from 1.1% to 1.7% since March.

You can follow USA TODAY reporter Paul Davidson on Twitter @PDavidsonusat and subscribe to our free Daily Money newsletter here for personal finance tips and business news every Monday through Friday morning.