This past Wednesday, the most powerful people in the financial world, also known as the FOMC, set the target federal funds rate between 1.25 percent and 1.5 percent, a 25 basis point (or 0.25%) increase.
This rate affects not only Wall Street, but Main Street as well. Especially if you have consumer debt like credit card debt, student loans, car loans and mortgages.
Let’s see how an increase in the Fed funds rate affects each.
Thinking about getting a car loan? Luckily for you, due to brutal competition, automobile manufacturers and car dealers have offered low-interest rate financing for years.
Auto loans usually come with 5-year terms, some even longer. With interest rates below 4.5%, depending on one’s creditworthiness.
So if you want to buy that Tesla Model 3, you should be more worried about whether Tesla will ever hit its target delivery date than what the Federal Reserve does with the federal fund target rate.
Credit Card Debt
That might not be such a great idea if you can’t pay off your card in full.
Based on data from the Federal Reserve, average interest rates are more than 13 percent. That’s already pretty high but with the recent Fed rate hike, expect your credit card interest rates to possibly go higher.
Unlike mortgages or car loans, credit cardholders are immediately affected whenever the Fed raises its benchmark rate.
Credit card interest rates are based on a bank’s prime rate, which is usually around 3% above the Fed’s benchmark rate.
But very few cardholders get charged the bank’s prime rate. Depending on your creditworthiness, your credit card will usually tack on a couple more percentage points on top of the prime rate.
According to a recent credit card study by NerdWallet, the average U.S. household carries $15,654 in credit card debt.
With a 0.25% increase by the Fed, the average credit card interest each household will pay each year increases from $904 to $919.
That doesn’t sound like much but the Fed says they might raise rates three more times next year so the interest can start to add up, especially since credit cards compound interest.
If you already have a mortgage, your interest rate is usually already “locked” in for the duration of the loan so for you….it’s all good in da hood.
When the Fed raises rates, it makes borrowing more expensive for commercial banks.
And because these banks believe that “sharing is caring” when it comes to additional costs, they’ll be more than happy to share them with their customer. It’s their way of showing that they’re not all about greed.
And no, it’s probably not a good idea either to take out a mortgage to buy bitcoin.
But if you have a non-government loan with a variable rate, then you better switch your major from fine arts to something else where you’ll actually find a job right after graduation because your loan is about to get more expensive.
Another option is to just become a bitcoin millionaire and skip or drop out of college.