Interest rate hike: What you need to know
The Federal Reserve’s decision to raise interest rates takes powerful aim at surging inflation. The central bank sets the cost of borrowing between banks, which forms the basis for mortgages, auto loans and credit cards. As interest rates rise, consumers and businesses may have to tighten their budgets to cope. That could mean resorting to bare-minimum credit card payments, which can eventually lead to late or missed debt payments and lower credit scores.
Consumers will see their credit card rates rise by roughly the amount that the Fed raised its prime rate, within one or two billing cycles. Most cards are based on the Fed’s prime rate, though they also have their own margins based on the creditworthiness of the issuing bank. Money market and certificate of deposit (CD) interest rates also rise, though that’s less noticeable since these savings vehicles usually offer minimal returns.
Businesses, too, will see higher financing costs, which can eat into profits and slow growth. That’s especially true for manufacturers, which are often saddled with high commodity prices. Companies like Hershey, Caterpillar and Johnson&Johnson have warned that rising interest rates will likely cut into their profitability.
It’s difficult to predict when rates will go back down again, but it’s probably safe to say that a couple more modest 0.25% cuts are expected by the end of 2024. Consumers looking to prepare for more rate hikes should create a budget and work toward building up savings. Meanwhile, borrowers with private student loans should consider refinancing to lock in a fixed-rate loan before interest rates rise further.
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