What the Fed’s Rate Hike Means for Credit Cards and Student Loans

The Fed’s decision to raise its key interest rate by three-quarters of a percentage point is good news for savers, but less so for borrowers: They can expect to pay more on credit card debt, car loans and certain home loans. students. [Here’s what the Fed’s decision means for mortgages.]

Credit card rates are closely tied to actions by the Federal Reserve, so consumers with revolving debt can expect those rates to rise, usually within a billing cycle or two. The average credit card rate was recently 16.73 percent, according to Bankrate.com, up from 16.34 percent in March.

“With the frequency of the Fed’s rate hikes this year, there will be a round of higher rates for cardholders every two statement cycles,” said Greg McBride, chief financial analyst at Bankrate.com. “And the cumulative effect is growing. If the Federal Reserve raises rates by a total of three percentage points this year, your credit card rate will be three percentage points higher by the first of the year.”

Auto loans are also expected to rise, but those increases continue to be dwarfed by the rising cost of buying a vehicle (and the pain of what you’ll pay at the gas pump). Auto loans tend to follow the five-year Treasury, which is influenced by the fed funds rate, but that’s not the only factor that determines how much you’ll pay.

A borrower’s credit history, vehicle type, loan term and down payment are included in the rate calculation.

The average interest rate on new car loans was 5.08 percent in May, according to Dealertrack, which provides trading software to dealers. That’s almost a full percentage point higher than in December 2021, when rates hit their lowest point since 2015 and when the company started tracking rates.

The average rate for used vehicles was 8.46 percent in May, also nearly a percentage point higher than December. But those rates vary widely; borrowers with the lowest credit scores received average rates of 20 percent in May, Dealertrack said, while those with the most pristine credit histories received rates of 3.92 percent.

Whether the rate increase affects your student loan payments depends on the type of loan you have.

But new batches of federal loans are priced in each July, according to the 10-year Treasury bond auction in May. Rates on those loans have already increased: Borrowers with federal college loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, versus 3.73 percent for loans disbursed the previous year.

Private student loan borrowers should also expect to pay more; Both fixed and variable rate loans are linked to benchmarks that track the fed funds rate. Those increases usually show up within a month.

But the Federal Reserve isn’t done and has targeted rates reaching 3.4 percent by the end of 2022. Private lenders will likely factor those and other expectations into their interest rates as well, meaning borrowers could end up paying between 1.5 and 1.9 percentage points more. , depending on the length of the loan term, explained Mark Kantrowitz, student loan expert and author of “How to Appeal for More College Financial Aid.”

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