Federal Reserve policymakers’ decision to raise the benchmark for short-term interest rates is about to affect Americans’ budgets.
The federal funds rate now stands at 3.75% to 4%, a quarter percentage point higher than before.
Fed Chair Kevin Warsh said the decision responded to stubborn inflation. Raising the target range is intended to make borrowing more expensive, which can limit demand and eventually bring down prices. But the Fed has little influence over tariffs, war in the Middle East and the AI buildout, all of which are contributing to higher prices.
As a result, borrowers can expect higher rates on credit cards and other variable-rate debt. Savers, on the other hand, may benefit from higher returns on high-yield savings accounts and certificates of deposit.
The impact depends largely on whether you are a borrower or lender, spender or saver, and heavily indebted or financially secure, according to financial professionals interviewed by USA TODAY.
Who Will Be Affected Most?
Stretched consumers — often people early or midway through their careers with median incomes or less and more floating-rate debt — are likely to feel the most pressure. Mid- to late-career people and retirees with assets and fixed-rate mortgages may be less affected.
People with substantial credit-card debt and little savings get the downside without much of the upside, said Matt Schulz, LendingTree’s chief consumer finance analyst.
How Will Credit Cards Be Affected?
A rise in the federal funds rate most directly affects credit-card interest rates.
Many consumers could see variable credit-card APRs rise by a quarter percentage point within one to two billing cycles. The dollar impact depends on the balance: Someone carrying an unpaid $100 balance for a full year might pay about 25 cents more in annual interest, while someone carrying $10,000 could pay about $25 more.
A quarter-point increase probably will not change a typical bill by much — perhaps an extra dollar or two a month — but the impact can add up if the Fed raises rates again. Most members of the rate-setting committee projected at least one more quarter-point increase before the end of the year.
What About Car Loans?
Because most auto loans are fixed-rate, people already paying off a car will not necessarily see higher interest payments. The increase can affect consumers shopping for a new vehicle, though.
A longer loan term may lower the monthly payment but increase the total interest paid. For example, a 72-month loan generally costs more in interest than a 60-month loan.
What Does It Mean for Savers?
A Fed rate hike typically means higher returns on high-yield savings accounts and CDs. Those with high-yield savings accounts may see yields improve over the next couple of months, including on existing balances. Banks and financial institutions often raise savings yields more slowly than they increase credit-card APRs.
For people living on savings or fixed income, higher rates can be a positive because cash, CDs and high-quality bonds may generate more income.
What Should Consumers Do Now?
Consumers can ask lenders whether they will lower their interest rates. In a LendingTree survey of 2,000 U.S. consumers earlier this year, 84% of cardholders who asked for a lower APR received one.
Consumers also can compare high-yield savings accounts at online banks or credit unions. The highest-yielding account cited in the original report offered a 4.21% annual percentage yield, 11 times the 0.38% national average, although requirements may apply and rates can change.
Some borrowers may consider refinancing debt with a 0% balance-transfer card or low-interest personal loan, but they should compare fees and rates carefully. If paying off debt is not possible, make at least the minimum payment on time and prioritize the costliest or most variable balance.
This article originally appeared on USA TODAY. Reporting by Rachel Barber, USA TODAY / USA TODAY. USA TODAY Network via Reuters Connect.
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