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6 things get more expensive as Fed rates rise

6 things get more expensive as Fed rates rise

tommaso79 / Shutterstock.com The Federal Reserve raised its benchmark rate of federal funds today by 0.75 percentage points - the largest increase s

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The Federal Reserve raised its benchmark rate of federal funds today by 0.75 percentage points – the largest increase since 1994 – placing it in a range of 1.5% to 1.75%.

The Fed took the action as part of its widely publicized campaign to bring inflation under control. Several additional interest rate hikes are likely between now and the end of the year.

As we have pointed out many times, an increase in the federal fund rate – which is the rate that banks charge other banks for short-term loans – always creates winners and losers. Some people benefit financially from interest rate hikes, others suffer. And many of us experience a bit of both.

The positive of interest rate hikes – mainly higher savings account and CD returns – is big. But in many ways, they pale in comparison to the potential damage that interest rate hikes can do to our finances.

Here are some areas of your financial life that are likely to become more expensive now that the Federal Reserve has once again raised the federal funds rate.

Cost of carrying a credit card balance

Paying your credit card bill in full each month is never a good strategy. But once the federal fund rate rises, things get much worse for those who carry a balance.

As you may have noticed, your credit card rate does not stay static over time. It is a variable rate that can go up and down. And when the Fed raises rates, lenders usually raise these volatile rates in response.

This is because the federal fund rate has a strong influence on the prime rate, which is the rate that commercial banks charge to their most creditworthy customers. Banks use the prime rate as a starting point for setting many other rates, including credit card rates.

So expect your credit card rate to rise after this latest increase. More importantly, now prepare for many additional federal funds’ interest rate hikes, and the likelihood that credit card borrowing costs will gradually rise.

The best way to avoid this danger is to pay off debt as quickly as possible. If you need help, check out Money Talks News’ Solutions Center, where you can find a trusted credit counselor.

To learn more tips on taming credit card debt, check out Money Talks News founder Stacy Johnson’s advice in “Tips and Tricks to Help You Debt Crash.”

Cost of buying a house

There is a widespread myth that when the rate of federal funds rises, rates on fixed bonds follow right behind it.

This is not exactly the case. There is no direct link between the federal fund rate and fixed rate rates. However, the two tend to move in the same general direction.

So, if the Fed continues to raise rates repeatedly, it will be unusual for mortgage rates to go the other way and start to fall significantly.

And in fact, mortgage rates have been climbing higher since the Fed launched its most recent rate hike campaign. This week, 30-year fixed mortgage rates rose by more than 6%, having nearly doubled since the beginning of the year.

If you already have a fixed rate mortgage, nothing will change with your payment. That rate is set in stone, and the Federal Reserve’s interest rate hikes do not affect the terms of an already established fixed rate loan.

However, if you have an adjustable-rate bond (ARM), things are different. A rising federal fund rate is more likely to increase your borrowing costs. ARMs periodically adjust according to the terms of the loan. Depending on the benchmark to which your loan is linked, your rate may move north in tandem with the federal fund rate.

Mortgage refinancing

Mortgage rates have moved sharply higher recently, and a rise in the federal fund rate will not help reverse that trend. Rates are now so high that a mortgage refinancing no longer makes sense for millions of homeowners.

Yet that does not mean you should reject mortgage refinancing outright, even after today’s Fed decision.

As we noted in the previous section, rates on mortgage loans with adjustable rates may be particularly sensitive to increases in the federal fund rate. So, if you have an ARM, it might be worth considering refinancing in a fixed rate loan, especially with the Fed promising to raise the federal fund rate – perhaps aggressively – a few more times.

If this sounds like the right move for you, go to Money Talks News’ Solutions Center and look for a good rate on mortgage refinancing.

Cost of buying a car

If you have the cash to buy a car straight away, you are golden: A rising federal fund rate will mean little to nothing for your finances while looking for a new vehicle.

But most of us are not so happy. Instead, we need a car loan to finance our purchase.

Thanks to the Federal Reserve’s latest move, rates on car loans are likely to push higher. If you need this type of loan, make sure you look around for the best rate. If you can afford it, you might also consider making a larger down payment as a way to cover some of those higher interest costs.

Cost of renovating your home

Americans love the lovely home, and they tend to pamper their accommodations by renovating it at every opportunity. If you used a home equity credit line – or HELOC – to finance a previous renovation and still pay off what you borrowed, get ready for your costs to rise.

HELOC rates are typically variable, meaning there is a good chance your lender will respond to a rise in the federal fund rate by raising the rate on your outstanding loan.

Cost of starting a business

This is an under-the-radar impact of an increase in the federal funds rate. Many small businesses borrow money to get started, and these loans can be linked to variable rates.

For example, the Small Business Administration’s 7 (a) loan program – the SBA’s most widespread loan program – offers loans at variable rates. As we mentioned earlier, these are the types of loans that are most sensitive to changes in the federal fund rate.

So, if you’re a small business owner who wants to borrow, your costs may be higher now, thanks to the Fed’s latest move.

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