Whether you have a mortgage, car loan or credit card, the Federal Reserve’s recent interest rate hike will impact your finances. Typically, higher rates are good for savers but can make it more expensive to borrow money.
When the Fed raises its key rate, which influences other rates like those on mortgages, auto loans and credit cards, it is meant to help control inflation by making it more costly to borrow. Consumers are expected to spend less when it costs more to buy things, which is exactly what the Fed hopes for.
Rate hikes are especially harmful to borrowers with variable-rate debt, such as credit card balances and home equity lines of credit. The cost of those debts will increase, increasing monthly payments and making it more difficult to pay off the debt if you fall behind. The same applies to adjustable-rate student loans, which also have a tendency to adjust.
While rising rates aren’t great for borrowers, they’re a boon to those who put their money in savings tools with high interest rates, such as bank accounts or investments that offer dividends. Higher rates mean you will receive a larger return on your investments, which can make it easier to hit savings goals such as building an emergency fund or saving for a vacation. To get the most out of your savings, try setting up automatic transfers from your checking account to a savings account each pay period. You can also work toward specific goals, such as an upcoming trip or a down payment on a new home, to make it more meaningful and motivating.
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