Tips On Handling Rising Interest Rates
By Aleksandra Todorova-Reporter, SmartMoney.com
INTEREST RATES affect more than just corporate balance
sheets. They can have a significant effect on personal finances
After 16 rate hikes-and with another potential increase coming
later this month, consumers are now paying more on many consumer
loans, including credit cards. On the flip side, rates on
savings accounts are going up, too-good news for short-term
five tips on handling your finances wisely when interest rates
are on the rise.
Put Your Cash to Work
These days, even large brick-and-mortar banks are offering
yields of 4% or more on savings and money market accounts.
At Citibank, for example, you can earn as much s 4.75% with
its e-savings account, an online account that can also be
accessed at any physical bank branch. Similarly attractive
yields are offered by banks like HSBC (4.65% APY) and Emigrant
Direct (4.65% APY) and online-only banks like ING Direct (4.25%).
Fight Credit Card Rate Hikes
Credit card issuers are quick to pass interest-rate hikes
to consumers. Most credit card interest rates are tied to
the prime rate, which currently stands at 8% -- double what
it was just two years ago. That means even consumers with
the best credit scores have seen their credit card interest
rates increase by four percentage points since 2004.
you do? If your credit history is good, try calling your creditor
and asking for an interest rate decrease. Alternatively, consider
transferring your balances to a lower-rate credit card. "You
don't see as many 0% APR offers as you did a few years ago,
but especially for those with good credit, there are rates
in the single digit available," says Greg McBride, senior
financial analyst at the Bankrate.com.
Fix Your Mortgage
Having an adjustable mortgage in a rising-rate environment
should make you a little nervous. But depending on what kind
of adjustable mortgage you have, you may still have some room
to breathe, says Keith Gumbinger, vice president of mortgage
information service HSH Associates. Say you took a 3/1 adjustable
rate mortgage (ARM) in 2003 and your rate is about to reset
this year: In 2003, the interest rates on those loans were
around 3.8%, Gumbinger says. And since rate increases do not
exceed two percentage points on most loans, when your rate
resets, you'll be looking at 5.8% -- still lower than today's
6.82% average on a 30-year fixed-rate loan, according to HSH
Associates. "Your decision process is delayed for a year,"
if your rate is about to reset to one higher than today's
prevailing rates? Refinance to a 30-year fixed loan now, Gumbinger
says. Granted, fixed-rate loans typically carry higher rates
than ARMs, but right now, the difference between a 30-year
fixed loan and a 5/1 ARM is only 50 basis points, according
to Gumbinger. "You can eliminate all the risk of rising
payments for very little more money per month," he says.
Alleviate HELOC Pain
Interest rates on home equity lines of credit are directly
tied to the prime rate and have risen significantly since
2004. While you have no control over where the prime rate
goes, it may pay to take out the loan papers and check the
markup you're paying over that prime rate, Gumbinger recommends.
why: Just several years ago, most lenders charged an interest
rate based on the prime rate plus a 1 % or 2% markup. But
as competition tightened in the past few years, that markup
was lowered, and in many cases eliminated. "Today, you
can find a prime plus 0% and even prime minus 1 % rate on
a HELOC," Gumbinger says. If you have an old loan with
a rate that resets to prime plus 2% each month, refinancing
Watch Your Credit Score
You can't control interest rates, but you can certainly take
charge of getting the best interest rates that lenders have
to offer. To do that, you'll need a top-notch credit score.
While credit score requirements vary for different lenders
and industries, generally a score in mid 700s or above is
likely to merit the best rates available, according to Craig
Watts, consumer affairs manager for Fair Issac, the company
that calculates credit scores.
your credit score takes time. The most important principles
to stick to: Always make timely payments, try to carry balances
that are 50% or less of your credit limits and don't apply
for new credit too often.