What Higher Interest Rates Mean at the Kitchen Table

Across the country, families are doing the same math: how to stretch a paycheck a little further to make ends meet. They’re weighing car payments, whether to carry a balance on their credit card for another month, or potentially postponing a major purchase. The Federal Open Market Committee’s recent decision to raise interest rates for the first time in more than three years won’t make consumers’ decisions any easier.

Raising the interest rate benchmark is one tool used by the Federal Reserve to keep inflation under control. Inflation has run above the Fed’s two percent target for more than five years. Headline inflation is sitting at 3.4 percent, and gasoline prices are up more than 27 percent from a year ago.

Consumers are feeling that pressure. Budgets already stretched at the pump, and the grocery store are now seeing credit become more expensive. Affordability was already the defining economic issue, and this makes that harder.

The Fed’s decisions are out of any family’s hands. How families respond to them isn’t. For millions of Americans, their local credit union is a solution to these challenges.

Financial institutions play an important role in helping consumers in the face of higher interest rates. When borrowing costs rise, institutions can pass increases through to customers or they can look for ways to cushion the blow. Credit unions are not-for-profit organizations, owned by the people who bank there. So, when a credit union does well, its members see that success in lower loan rates, better savings rates, and fewer fees rather than in a shareholder dividend.

The first pressure point is variable-rate debt. Credit card balances, home equity lines and many personal loans rise along with the Fed-set rate. So, households carrying a balance will feel the recent increase.

Americans have more room to shop for credit than they realize. Loan rates vary widely from lender to lender, and the gap is widest for borrowers with less-than-perfect credit, the people who can least afford to overpay.

That’s where credit unions come in. For one example, economists estimate that a typical subprime borrower can save $6,500 over the life of a car loan by financing through a credit union.

What’s more, higher rates aren’t all bad. Savers can earn a higher return from money-market-like funds, and families who have modest emergency savings are better protected when the unexpected hits.

At the same time, Americans should also stay alert. When budgets tighten, scams follow, and offers that promise easy relief are often dangerous.

The cooperative finance model was built for moments like this one. Credit unions are among the good options out there, and it’s a reminder that consumers have more choices than they sometimes realize.

The Fed will do what it believes it must to bring inflation under control, and families will feel the effects either way. What they can control is where they borrow, where they save, and who they trust with their money. In a stretch like this, those choices matter more than ever, and the credit union industry stands ready to support.

Scott Simpson is President and CEO of America’s Credit Unions, which represents the nation’s credit unions and their more than 146 million members.