The Federal Reserve raised its benchmark federal funds rate by 25 basis points, lifting the target range to 3.75%-4% in a unanimous vote. The central bank’s first rate increase in more than three years directly impacts borrowing costs for variable-rate debt, including credit cards and home equity lines of credit, according to George Kamel, co-host of The Ramsey Show.
Federal Reserve Raises Benchmark Rate to 4 Percent
The Federal Reserve approved a 25 basis-point increase to its benchmark federal funds rate earlier this month, moving the target range to 3.75%-4%. The adjustment concludes a prolonged period of steady rates that began after the central bank’s previous increase in July 2023. Federal Reserve officials implemented the policy shift to counter ongoing stubborn inflation.
Immediate Impact on Credit Cards and Variable-Rate Debt
Consumers carrying variable-rate debt will bear the heaviest burden from the central bank’s policy change. George Kamel, co-host of The Ramsey Show, told FOX Business that borrowing has become more expensive across multiple revolving credit products.
“Borrowing just got a little bit more expensive,” Kamel said. “Think, your credit card—instead of 28%, it might be 28.25%.”
Variable-rate products affected by the rate hike include:
- Credit cards carrying high annual percentage rates (APRs)
- Home equity lines of credit (HELOCs)
- Adjustable-rate mortgages (ARMs) upon their scheduled reset dates
Consumers with existing fixed-rate mortgages, auto loans, and other fixed-rate obligations will experience no change in their monthly payments.
Strategies for High-Interest Debt and Mortgage Borrowers
With credit card APRs ranging between 20% and 30%, Kamel recommends that consumers aggressively eliminate revolving balances rather than absorbing incremental cost increases. He advises consumers to stop using the cards immediately and direct extra cash toward the principal.
For paying down multiple balances, Kamel recommends the debt snowball method. This strategy involves paying off debts in order from the smallest balance to the largest while maintaining minimum payments on all other accounts.
Prospective homebuyers face a different lending environment. Kamel noted that mortgage rates correlate more closely with Treasury yields and the bond market than directly with the federal funds rate. However, prospective buyers should still expect elevated borrowing costs. “It’s not going to be a life-changing amount, but it just makes it a little bit more difficult for those people who are trying to get their foot in the door of homeownership,” Kamel said.
Yield Increases for Savers and Emergency Funds
While borrowers face rising expenses, savers stand to gain modest benefits from the central bank’s decision. Kamel pointed out that financial institutions are likely to gradually increase yields on high-yield savings accounts.
“There is a silver lining to the Fed funds rate hike, and that is high-yield savings accounts could get a boost,” Kamel said, providing depositors with higher returns on emergency funds and down-payment accounts.
Kamel advises consumers to maintain a long-term perspective on monetary policy rather than reacting to individual central bank meetings. “The Fed is going to move rates up and down for the rest of your life,” Kamel said. “Your job is to make sure it doesn’t matter when they do.”