How a fed rate hike affects USAA members

How a Fed Rate Hike Affects USAA Members

How a Fed Rate Hike Affects USAA Members USAA Community.jpeg

By: Mikel Van Cleve, CFP®

 

A ripple effect occurs when the Federal Open Market Committee (FOMC) announces a change to its benchmark interest rate, the federal funds rate.

 

One of those trickle effects is the prime rate. If the federal funds rate increases, the prime rate will typically reflect the change as well. Banks and financial institutions who use the prime rate as a benchmark — including USAA Bank — will adjust their rates to reflect this change. As a result, individuals will see a difference on their credit card statements.

 

The Federal Reserve approved two federal funds rate target increases this year of 0.25% and 0.5%, with additional increases anticipated during 2022. The FOMC1, a committee within the Federal Reserve, makes decisions about the target federal funds rate based on current economic factors. Federal Reserve Chair Jerome Powell said these increases were decided to fight inflation that’s jeopardizing U.S. economic recovery post-pandemic.

 

Credit card holders are among the first who will feel the effect by seeing an increase in the minimum payment due on their credit card statements. USAA Credit Cards with Variable Annual Percentage Rates (APRs) will be affected by these fed rate hikes, and members will see the interest rate increase on their May and June credit card statements.

 

This is the biggest interest rate increase in years, and we want to make sure you understand how it works and the ways you can lessen the impact to your finances.

 

What is the prime rate?

 

The prime rate1, which is a rate set by individual banks, is one of the most widely used benchmarks that banks and financial institutions use to determine the APRs on their lending products, including credit cards. Variable APRs on USAA accounts are determined based on the prime rate plus a margin; however, the margin component of the rate is not changing. (See more in your USAA Credit Card Agreement.)

 

In addition to credit cards, other forms of consumer borrowing available within the financial services industry will likely be affected by the prime rate increase. They can include, but are not limited to, Variable APR products such as home equity loans and lines of credit, student loans and personal loans.

 

Consumers who are paying back loans that have fixed-rate APRs, meaning the interest rate was locked in at the time the loan was approved, will not see an interest rate increase, and therefore no change to their current payment amounts. However, any new fixed-rate loans that are issued will likely have a higher APR than before.

 

Lessening the Impact of Rate Hikes USAA Community.jpeg

Lessening the impact of higher interest rates

 

Most credit cards have variable APRs and compounding interest, meaning that if you leave any unpaid balance, interest will be charged on that amount in addition to any new charges on the next bill. If you’re not careful, these interest payments can grow exponentially and put you further in debt.

 

With an increasing variable APR, this situation could happen even sooner. Here are five ways to help avoid it and prepare for the next interest rate hike that may occur.

 

  1. Pay off credit card balances in full each billing cycle. The interest rate is irrelevant if you never have to pay it.
  2. Stick to a budget. Those most impacted by an increase in the prime rate typically carry a significant amount of variable-rate debt. Tracking income and expenses can help you avoid overextending and getting into a financial bind.
  3. Look for options to consolidate variable rates into a fixed rate. You can use the USAA personal loan calculator to see if it makes sense for you to consider obtaining a fixed-rate personal loan to consolidate variable-rate debt.
  4. Consider consolidating variable rate student loans to a fixed rate. For federal student loans, visit the student aid websiteto learn more about your options. Before making the decision to consolidate, consider any loss of benefits from the original loan. For private student loans, contact your lender to discuss options.
  1. Think about spending big sooner than later. If you’re planning to make a major purchase, such as a vehicle, now may be the time to move. As long as you can afford the payment and other associated costs, such as insurance and gas, then buying before rates increase even more could save you money.

 

SCRA still applies for qualifying service members

 

The Servicemembers Civil Relief Act (SCRA), state military benefits or the USAA Military Benefits Program, collectively referred to as Military Benefits, provides protections such as interest rate reductions to qualifying service members.

 

Federal SCRA guidelines require that obligations incurred by a service member before entering qualifying military service be limited to an interest rate of 6%. However, in support of our commitment to go above and beyond for our military members, we limit interest rates to a maximum of 4%. These Military Benefits will still apply regardless of the fed rate hike.

 

This blog provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank and/or USAA Savings Bank do not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates.

 

1You are leaving USAA and being directed to a third-party site that is not maintained, owned or operated by USAA. USAA does not control and is not responsible for the site content or the privacy or security practices of third parties. You should read the third party's privacy and security policies and site terms, as their practices may differ from those of USAA.

 

Credit cards are issued by USAA Savings Bank and serviced by USAA Federal Savings Bank. Other bank products are provided by USAA Federal Savings Bank. Both banks are Member FDIC.

 

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