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Making Sense of Higher Interest Rates and the Impact on Your Wallet

man considering his financial options
AffinityFCU
By: AffnityFCU

Date: June 22, 2022

There has been much speculation surrounding interest rates over the last several years, as the nation continued to navigate the pandemic, and consumers and businesses adjusted to the “new normal.” Amid the uncertainty, the Federal Reserve (“Fed”) kept its target federal fund rate low to safeguard the economy.

The Fed – which is our U.S. central bank and is responsible for setting monetary policy, including interest rates – forecasted its push to increase rates in 2022 and continues to act on this promise. The body increased rates by 25 basis points (bps) in Marchat their March – its firs rate hike in three years – and continued the upward trend with a 50 bps hike in May and a 75 bps increase in June. The June increase was the largest increase since 1994.1 The Fed previewed additional rate hikes2 through atleast early fall to help manage inflation and other economic concerns.

This change has a trickle-down impact on consumers, making it more expensive to borrow funds for home and auto loans, as well as credit card interest rates and more.

Making Sense of Interest Rate Changes
Changes to the federal funds rate generates much buzz and can initiate some far–reaching implications. Importantly, the changes initiated by the Fed impact the U.S. prime interest rate – or the base rate that all credit unions and banks use to determine their rates for you, the consumer. Effective June 2022, the the prime rate moved3 from 3.5% to 4.75%.

The prime rate is dictated by economic conditions, meaning changes are not scheduled. The economic environment has kept the prime rate consistent since 2020. However, as the economy recovers from historic lows in March 2020, the rate will continue to move. The prime rate can change multiple times in one year. In fact, in 2001, the prime rate changed 11 times!  

Interest Rate Implications: What This Means for Your Wallet
Importantly, changes to the prime rate only impact adjustable–rate loans; fixed–rate loans are not impacted. However, many debt payments, including credit cards, student loans and home equity lines of credit, are adjustable–rate loans. As such, your monthly payments will be impacted.

Just how much of a change will you see? The rate change of 0.25% amounts to 25 cents for every $100 in principal. This means smaller balances will not be impacted as substantially as large loans. Here’s where we expect to see some short–and long–term changes:

  • Consumers with adjustable-rate mortgages will see changes occur in the scheduled and annual adjustment.
  • Consumers with home-equity lines of credit will see immediate adjustments to monthly payments.
  • Consumers with credit card debt will see rate and monthly payment changes within several months. Affinity credit cards4 have a maximum interest rate of 18% and no annual fees, a significant benefit for our members.
  • Consumers with student loan debt from private institutions will likely see changes in their interest rate too. Federal student loans have a fixed rate and won’t be impacted.
  • Consumers originating new loans, including auto loans and mortgages, can expect to see higher rates immediately.

A Look Ahead
Despite the most recent change and forecast for additional adjustments this calendar year, interest rates remain at historically–low levels. Notably, the Fed maintains a holistic view of the economy and closely monitors how the markets, consumers and economy react to a rate increase. This means it could change course on its planned rate hikes should conditions change. The silver lining of these rate changes: rising interest rates mean the Fed has a very optimistic view of the economy which could mean additional opportunity moving ahead.

Our team is dedicated to keeping our members informed of the latest economic and market changes and the impact on your financial picture. If you have questions about your financial picture, how interest rate changes will impact your finances and goals, or how Affinity can help you navigate these changes, schedule an appointment with our team or visit one of our branches. 

This information is for informational purposes only and is intended to provide general guidance and does not constitute legal, tax, or financial advice. Each person’s circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments.

 

  1. Retrieved from: https://www.cnbc.com/2022/06/15/real-time-updates-of-the-feds-big-rate-decision-and-powells-press-conference.html
  2. Retrieved from: https://www.reuters.com/markets/europe/fed-lift-rates-by-75-basis-points-july-50-bps-september-2022-06-22/
  3. Retrieved from: https://www.forbes.com/advisor/investing/prime-rate-definition/
  4. Retrieved from: https://www.affinityfcu.com/Credit-Cards/index.aspx
Interest RatesPersonal Banking