Something you've likely seen or heard about many times in the news is the state of interest rates. Currently there's a lot of buzz around the Federal Reserve pausing interest rates hikes. But what does that really mean for you? Sometimes it can be complex to know, which is why I'm here to break down how interest rates impact your day-to-day life.
How Interest Rates Are Determined
The interest rates we see as consumers are heavily influenced by the Federal Fund Rate which is set by the Federal Reserve or "The Fed". The Federal Fund Rate is the rate banks use to borrow money from each other. Financial institutions then base the interest rates they set off of what the federal fund rate is.
For example, right now, the Federal Reserve's target range for the Federal Fund Rate is at 5.00-5.25%. But for those looking to buy a new car or secure a mortgage, they are looking at interest rates around 7.1%. Meanwhile, credit card interest rates are round 20%.
How Interest Rates Impact You
As noted in the example above, interest rates affect everything from mortgages to car loans, and even credit card payments. Interest rates also play a role in how much you make off your savings.
When interest rates are lower, it's easier to borrow money, which encourages spending and keeps the economy moving. But the downside to this is that as more money becomes available, the spending power of each dollar is reduced, which leads to increased prices as a result of inflation. When inflation occurs, the Fed will raise interest rates to help cool rising costs. This is why we've seen interest rates rise lately, as the Fed works to slow the record high inflation we've been dealing with.
When rates are low, it can be a good time to consider a big purchase, like buying a new home, refinancing your mortgage, or buying your dream car. When rates are high, you should generally pause most major purchases and work on paying off debt as fast as you can. Higher rates can lead to more debt on accounts with variable rates.
Also, as interest rates increase, typically so does your annual percentage yield (APY) which is the interest you receive off the money in your savings account. So, while higher interest rates aren't good for spending, they can be beneficial when it comes to your savings. In fact, right now is a great time to look into savings certificates/certificates of deposits. PFCU is currently offering a 1 year, 4.3% APY savings certificates. If you're not looking to lock up your money for a year with a certificate, PFCU's higher yield savings is also up. This is the first time in a long time where it makes sense to put your every day savings into a higher yield savings account.
Understanding how interest rates impact you is very important for your overall financial health. Make sure you are monitoring interest rates so you know when the right time to make that next big purchase will be.
Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM