Federal Reserve's interest hike will hit consumers who borrow or use credit
PITTSBURGH (KDKA) — The Federal Reserve boosted interest rates again on Wednesday in a move to slow the inflation rate.
As KDKA money editor Jon Delano explains, it's going to have a real impact on consumer spending in the weeks ahead.
For the second time in a row, the Federal Reserve raised what's called the Feds Fund Rate by three-quarters of a percent. That may not sound like a lot, but economists say it will have a significant effect on your ability to spend money borrowed through a consumer loan or your credit card.
"We'll see credit card interest rates move even higher. The Fed is trying to slow economic growth. One thing they can do is make it more expensive for consumers to borrow. So, that includes credit cards," says Dr. Gus Faucher, PNC's chief economist.
Unless you pay off your credit cards every month, you will pay more in interest. That also includes any car loans consumers need to buy a car in the months ahead.
"I would say about 90 percent of people finance a vehicle," says Gil Kokowski, the finance director at Dean Honda in West Mifflin.
Kokowski says these interest rate hikes will hit car buyers everywhere. Take a $40,000 vehicle financed over five years.
"From about three months ago, the payment was $779 to now you'll be looking at $855 for the same car," he says.
One way to make that affordable, at least on a monthly basis, is to stretch out or extend the term of the loan from five years to seven years
"The normal length is about 60 months to 72 months. But with the rates going up, it is stretching out to 84 months to make it more affordable," says Kokowski.
Another key factor is your credit score.
"It's very important. Your credit, basically, that's how the banks determine what your rate will be. Right now, you probably want to be around 750 or higher."
The Federal Reserve says the best way to cut a 9 percent inflation rate is to make it more expensive for consumers to spend money through credit cards, home equity loans and car loans.
"The Fed wants us to spend money, just not as much as we've been spending recently. So, they're making it more expensive for consumers to borrow. They're making it more expensive for businesses to borrow," says Faucher.
The Fed wants to get inflation down to 2 percent, so raising the interest rate on credit is supposed to reduce consumer spending.
"I believe the rates will continue to keep going up," says Kokowski about car loan rates.
He says car loan interest rates have jumped recently and will jump again. So, buying a car? Do it now before the rate hike kicks in.
Delano: "There's still time to buy a car at today's rates?"
Kokowski: "Yes, I would say until the end of the month."
Another consumer loan taking a hit is home equity loans.
Local mortgage broker Jim Martin says 62 percent of homeowners have a home equity loan. With the Fed raising its rate by three-quarters of a percent, those monthly bank payments will go up, too.
"If you increase the rate by three-quarters of a percent, depends on your balance but that could have a pretty significant impact on your monthly budget," says Martin.
Some good news, says Martin, is that home mortgage rates, while higher than a few months ago, are trending down.
"Those actually have been coming down since June," says Martin. "If you've been out looking for a house, this is still a great time to do it. The market is actually improving because of what the Fed is doing today and they did last month."
That's good if you're house-hunting. But for most of us, it's the credit card, home equity and consumer loan rate hikes that hurt.
The Fed meets next in September and whether rates go up again will depend on what the economy does in the meantime.
