What high borrowing costs mean for you and your money

The Federal Reserve signaled at the end of its two-day meeting on Wednesday that interest rates will remain high for some time, forcing Americans to adjust to a reality where borrowing money is much more expensive than it used to be.

In this new era of high interest rates, savers will benefit from good returns on low-risk investments like Treasurys, but borrowers face higher debt payments on everything from credit cards to mortgages to student loans.

The policy makers voted during the meeting for leave interest rates unchanged to a range of 5.25% to 5.5%, the highest level since 2001. But officials also indicated that rates are unlikely to be cut significantly in the near term as high inflation continues, meaning that borrowing money it will remain much more expensive than it was four years ago.

Federal Reserve Chairman Jerome Powell holds a news conference at the end of the two-day meeting of the Federal Open Market Committee at the Federal Reserve in Washington, DC, on March 20. (Mandel Ngan/AFP via Getty Images/Getty Images)

For Americans who carry a balance from month to month, the new era of consistently high interest rates could cost them hundreds — even thousands — of dollars.

While the federal funds rate is not what consumers pay directly, it affects borrowing costs for home equity lines of credit, car loans and credit cards. Higher rates have helped push the average 30-year mortgage rate above 7% for the first time in years.

Actually, housing affordability it’s as bad today as it was during the height of the housing bubble in 2008 thanks to the astronomical rise in mortgage rates.

of Atlanta Fed Housing Affordability Monitor, which compares median home prices and other housing costs to median household income, shows that the average American household will have to spend about 41.7% of their income to afford the median-priced home as of March. While this marks an improvement from the end of 2023, when affordability hit a nearly two-decade low, it is still far worse than the typical pre-pandemic level.

Americans with credit card debt are also feeling the pinch from higher rates. Average credit card interest rates have already risen from 16% in February 2022, before the Fed began raising rates, to 20.67% as of Wednesday, near a record high, according to a Bankrate database.


Even just a small change in credit card rates can affect how much Americans owe.


For example, if you owe $5,000 — which the average American does — current April rates would mean it would take about 277 months and $7,723 in interest to pay off the debt by making the minimum payments. By comparison, the same amount of debt would have taken 269 months and $6,126 to pay off when interest rates were lower.

Those rates aren’t likely to drop significantly anytime soon, thanks to the Fed’s higher-for-longer policy stance.

“Interest rates are not likely to come down quickly enough, or soon enough, to provide meaningful relief to borrowers,” said Greg McBride, chief financial analyst at Bankrate. “Take advantage of zero percent credit card balance transfer offers, shop for lower fixed rate personal loans and home equity loans, and channel as much income as possible toward paying off that debt as quickly as possible as possible.”

A pedestrian passes the Federal Reserve Building in Washington, DC, on June 3, 2023. (Nathan Howard/Bloomberg/Getty Images)

But there is also a silver lining to higher rates for many consumers.

MOST banks and credit unions will increase their savings rates during periods of higher interest rates, making it a good chance for some Americans, especially retirees living off their savings, to earn more.

The national average bank savings rate hit 0.58% as of June 3, according to Bankrate, though rates are as low as 0.01% at some of the largest U.S. banks


There’s another much more lucrative option: high-yield savings accounts, many of which now pay between 4.2% and 5.3%, providing an option for consumers looking for a lower-risk return. Savers can open a high-yield online savings account, but they must make sure the bank is insured by the Federal Deposit Insurance Corporation (FDIC).

There are now more than two dozen savings and money market deposit accounts nationally from FDIC-insured banks that pay a rate of 3.75% or higher, according to Bankrate.

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