What the Fed’s rate hike means for credit cards and student loans

The Fed’s decision to raise its key 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, loans automobiles and some student loans. [Here’s what the Fed’s decision means for mortgages.]

Credit card rates are closely tied to Fed actions, so consumers with revolving debt can expect to see these rates increase, usually within one or two billing cycles. The average credit card rate was 16.73% recently, according to Bankrate.com, compared to 16.34% in March.

“With the frequency of Federal Reserve rate hikes this year, it will be a drumbeat 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 Fed 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 climb, but those increases continue to be overshadowed by the rising cost of buying a vehicle (and the pain of what you’ll pay at the gas pump). Auto loans tend to track the five-year Treasury, which is influenced by the federal 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 all factor into this rate calculation.

The average interest rate on new car loans was 5.08% in May, according to Dealertrack, which provides business software to dealerships. 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% in May, also nearly a percentage point higher than in December. But these rates vary widely; borrowers with the lowest credit scores received average rates of 20% in May, Dealertrack said, while people with the cleanest credit histories received rates of 3.92%.

Whether the rate increase will affect your student loan repayments depends on the type of loan you have.

But new batches of federal loans are priced each July, based on the auction of 10-year Treasury bonds in May. Rates on those loans have already jumped: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99%, up from 3.73% for loans disbursed the year before. .

Private student borrowers should also expect to pay more; Fixed-rate and variable-rate loans are linked to benchmarks that track the federal funds rate. These increases usually appear within a month.

But the Fed is not done and has forecast rates reaching 3.4% by the end of 2022. Private lenders will likely incorporate these and other expectations into their interest rates as well, meaning that borrowers could end up paying 1.5 to 1.9 percentage points more. , depending on the length of the loan, explained Mark Kantrowitz, student loan expert and author of “How to Apply for More College Financial Aid.”

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