Federal Reserve Rate Increase Signals Higher Borrowing Costs, Modest Gains for Savers

The Federal Reserve’s first interest rate hike in more than three years is poised to raise borrowing costs for consumers, particularly those holding variable-rate debt such as credit cards and home equity lines of credit.

Earlier this month, the central bank voted unanimously to raise its benchmark federal funds rate by 25 basis points, moving the target range to 3.75%–4% from 3.5%–3.75%. The move marked the first increase since July 2023, following a period of rate stability through the first five policy meetings of the year.

“Borrowing just got a little bit more expensive,” said George Kamel, co-host of “The Ramsey Show,” in an interview with FOX Business. “Think of your credit card — instead of 28%, it might be 28.25%. A new fixed-rate mortgage might move from 6% to 6.25%.”

Kamel said the Fed’s decision primarily affects variable-rate debt, including credit cards. (iStock)

Kamel explained that the rate adjustment primarily impacts variable-rate obligations, including credit cards, home equity lines of credit (HELOCs), and adjustable-rate mortgages upon reset. Consumers with existing fixed-rate mortgages, auto loans, and other fixed-rate debt will generally see no change in their monthly payments.

For Americans carrying credit card balances, Kamel said the latest hike serves as another reminder to prioritize paying down high-interest debt.

“Credit cards carry some of the highest APRs of any consumer debt, ranging from 20% to 30%,” Kamel noted. “Cut up the cards, stop using them, don’t add to the balance, and aggressively pay down the principal until it’s gone.”

Mortgage rates are influenced more by Treasury yields and the bond market than by the federal funds rate, Kamel said. (iStock/Getty Images Plus)

Kamel recommended the “debt snowball” method, which involves paying off debts from the smallest balance to the largest while maintaining minimum payments on all other accounts.

He added that mortgage rates are driven more by Treasury yields and the broader bond market than by the federal funds rate directly. Still, prospective homebuyers may see borrowing costs edge slightly higher.

“It’s not going to be a life-changing amount, but it just makes it a little bit more difficult for those people who are trying to get their foot in the door of homeownership,” he said.

Savers, however, may see a modest benefit. Kamel noted that banks could gradually raise yields on high-yield savings accounts, allowing consumers to earn more on emergency funds and down-payment savings.

Ultimately, Kamel said consumers should focus on paying down variable-rate debt and building savings rather than worrying about future Fed moves. (FOX Business)

“There is a silver lining to the Fed funds rate hike, and that is high-yield savings accounts could get a boost,” he said.

Overall, Kamel advised consumers to concentrate on reducing variable-rate debt and building savings rather than fixating on future Fed actions.

“The Fed is going to move rates up and down for the rest of your life,” he said. “Your job is to make sure it doesn’t matter when they do.”

Source link