Federal Reserve rate hikes can send shockwaves through stock markets and put many people to sleep. But just because the nitty-gritty of the country’s fiscal policy isn’t exciting to most does not mean we’re unaffected. For example, consumers will pay around $33.4 billion in extra interest charges over the next 12 months due to the Fed’s 500 basis points in rate hikes between March 2022 and May 2023. In addition, if the Fed raises its target rate by 25 basis points on June 14 (31% probability), it will cost consumers another $1.7 billion over the next 12 months. That would bring the annual cost of the Fed’s recent rate hikes to a whopping $35 billion in total.
Interest rates on financial products, from credit cards to car loans and mortgages, are generally based on some sort of benchmark rate, which in turn is influenced by the Federal Reserve’s target interest rate in one way or another. So when the Fed’s target rises, the interest rates consumers pay also go up, increasing the cost of borrowing. Unfortunately, the rates we earn on deposit accounts aren’t nearly as quick to react.
U.S. consumers are back to bad habits when it comes to credit card debt. Consumers added an all-time record $179.4 billion in new credit card debt to their tab during 2022, capped off by an $84.9 billion increase during the fourth quarter alone. Now, consumers have started 2023 by paying down just $24 billion – the second-smallest first-quarter credit card debt paydown in the past decade.
Below, you can see how Fed interest rate increases have impacted consumers’ finances in the past, as well as how much we can expect a June 2023 rate hike to cost us.
Credit Cards
The vast majority of credit card rates are variable, tied to the Prime Rate. As a result, we expect to see credit card rates rise the same amount as the Fed’s target.
A 25-basis point increase (31% probability) will cost credit card users at least $1.7 billion over the next 12 months.
Due to the 500 basis points in rate hikes between March 2022 and May 2023, credit card users will wind up with at least $33.4 billion in extra interest charges over the next 12 months.
Mortgages
We don’t expect much of a change in mortgage rates following a June rate hike, as the mortgage markets have already accounted for the move. That’s because mortgages have fixed rates that are priced with a far longer time frame in mind than other borrowing vehicles.
WalletHub’s analysts estimate that the upcoming June rate hike has increased the cost of new mortgages by around 11 basis points, which translates to roughly $11,160 over the life of a 30-year loan, assuming the average home loan of $429,700.
Auto Loans
WalletHub expects the average APR on a 48-month new car loan to rise by around 12 basis points in the months following the Fed’s next 25 basis point rate hike.
For historical context, the average APR on a 48-month new car loan rose from 4.00% in November 2015 to 5.50% in February 2019. That’s a 150-basis point increase in a period characterized by 225 basis points in Fed rate hikes.
Deposit Accounts
WalletHub expects little, if any, change in the APYs available from most deposit accounts following the Fed’s next rate hike. Online savings accounts are the exception, as WalletHub projects a 14-basis point increase in the average APY following the Fed’s June rate hike.
Online savings account yields increased by an average of 279 basis points from January 2022 to May 2023, despite 500 basis points in Fed hikes during that period. Banks seem quick to pass higher rates to consumers on loans but are not sharing the love on the deposit front.
With household finances already under pressure and the Fed releasing its G19 report today, the personal finance website WalletHub released its latest Credit Card Debt Study, which found that consumers’ first-quarter paydown was the second-smallest in a decade (just $24 billion). The study also identified the cities with the largest year-over-year increase in credit card debt.
Credit Card Debt in New York:
- Q1 2023 Change in Household Debt: $3,320
- Average Household Debt: $18,753
- Q1 2023 Total Change in Debt: $10,790,798,438
- Total Outstanding Debt: $60,957,972,303
Credit Card Debt Study
- Low Debt Reduction. Consumers started 2023 by paying off $24 billion in credit card debt. That is the second-smallest first-quarter paydown in the past ten years.
- High Average Household Debt. The average household credit card balance was $9,654 at the beginning of 2023. That’s $2,566 below WalletHub’s projected breaking point for household finances.
- Best Balance Transfer Credit Cards. The best balance transfer credit cards currently offer 0% APRs for the first 12-21 months with no annual fee and low balance transfer fees.
