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What the latest interest rate decision means for you


New York
CNN
 — 

Eleven times in 17 months. That’s how fast the Federal Reserve has hiked its overnight bank lending rate, which directly or indirectly affects many consumer rates.

The Fed’s aggressive campaign is intended to beat down inflation. And it may be working. Based on the latest reading, inflation as measured by the Consumer Price Index grew at just 3% in June. And the Fed’s preferred inflation measure — the core Personal Consumption Expenditures Index — inched down to 4.6% in its latest reading.

In either case, both numbers are still above the Fed’s 2% target, which suggests the US central bank may not be done quite yet.

“Despite the euphoria over inflation coming down from 9.1% to 3% in the past year, the trend on core inflation readings — which exclude volatile food and energy components to provide a better read on inflation trends — is much less impressive,” said Greg McBride, chief financial analyst at Bankrate.com.

So when might the Fed be willing to stop raising rates?

“We may be waiting for a protracted period of cooling inflation before we see a halt to interest rate hikes,” said Michele Raneri, vice president and head of US research and consulting at TransUnion.

Either way, here are three ways the Fed’s latest hike announced Wednesday could either take a bite out of your wallet or benefit you.

Let’s focus on the upside first.

The national average savings account rate was just 0.52% as of July 17, according to Bankrate.

But your money can earn you far more in online high-yield savings accounts at FDIC-insured banks, many of which are paying between 4.5% and 5% as of Wednesday. By contrast, the largest banks, like JPMorgan Chase and Bank of America, still pay next to nothing — think 0.01%.

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If you have enough in savings that you can leave some untouched for anywhere from one month to a year, you’ll be able to lock in a high rate by putting some money in a certificate of deposit at an FDIC-insured bank.

While the average rate on a one-year CD was only paying 1.58% as of July 17, according to Bankrate, there are some one-years on offer that pay well over 5%. And you can get shorter-term CDs that pay between 4% and 5%, with some even paying up to 5.35%, according to Schwab.com.

When Fed rates go up, so do credit card rates.

So it’s not surprising that card rates in the past year have been trending at around 20-year highs.

As of July 19, the average credit card interest rate is 20.44%, down slightly from the 20.58% recorded the week before, according to Bankrate.com. Nevertheless, that is still more than 6 percentage points higher than the average recorded at the start of last year.

But the 20.44% average doesn’t tell the whole story, since it’s the overall average for all cardholders, including those who are never charged interest because they pay their bill in full and on time every month.

If, however, you just look at the universe of people who actually do pay interest because they carry a balance from month to month, their average rate is even higher. Second-quarter data from the Fed shows the average rate for them is 22.16%.

If you carry a balance, and especially if you only pay the minimum due, you will be shelling out a lot of money every month just for interest, which means it will take you even longer to pay off what you owe.

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“For someone with $5,000 in credit card debt on a card with a 22.16% [rate] and a $250 monthly payment, they will pay $1,298 in total interest and take 26 months to pay off the balance,” said Matt Schulz, chief credit analyst at LendingTree. “Cardholders’ best move is to assume that rates will continue to rise, and use that as further motivation to continue to knock down their credit card debt.”

One option is to find a good balance-transfer card with an initial 0% rate for up to 21 months. Then pay off what you owe in the coming months before that 0% rate expires. If you don’t, then your remaining balance will be subject to a much higher rate — and perhaps even higher than what you had before you transferred your balance.

Buying a home, improving a home and borrowing against it are among the biggest financial moves most people make in their lives. And the cost of doing all of the above has steadily risen.

The average rate on a 30-year mortgage was 6.78% in the week ending July 20, down from 6.96% the week before, according to Freddie Mac. Nevertheless, it is still well above the 5.54% registered a year ago.

For someone who takes out a 30-year fixed-rate mortgage of $350,000 at today’s rates, they will pay an extra $281 a month compared to what they would have owed if they’d taken out the loan last year at 5.54%, according to LendingTree. That translates to an extra $101,600 over the life of the loan.

To help guard against future rate hikes, if you are close to buying a home, it may be a good idea to lock in the lowest fixed rate available to you — assuming you can afford the loan.

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Keep in mind too, that mortgage rates are not tied directly to the Fed’s overnight lending rate, but rather track the yield on the 10-year US Treasury note. The yield on that note reflects investor sentiment about inflation and the economy.

If inflation continues to cool, the 10-year yield may move down, and mortgage rates would fall, too.

By contrast, fixed-rate home equity loans and variable-rate lines of credit are directly tied to the Fed’s moves. The average national rate on a home equity loan is 8.47% as of July 25, according to Bankrate. And the average on a home equity line of credit is 8.58%.

With both, the rate you can secure will vary depending on, among other things, the size of your loan, how much equity you have in your home, your credit score and your income.

If you have already used a home equity line of credit for a home improvement project, ask your lender if it’s possible to fix the rate on your outstanding balance, effectively creating a fixed-rate home equity loan, McBride suggested.

If that’s not possible, consider paying off that balance by taking out a HELOC with another lender, at a lower promotional rate.

— CNN’s Anna Bahney contributed to this story.

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