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5 Tips On Handling Rising Interest Rates
By Aleksandra Todorova-Reporter,


RISING INTEREST RATES affect more than just corporate balance sheets. They can have a significant effect on personal finances as well.
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 investors.

Here are five tips on handling your finances wisely when interest rates are on the rise.

1. 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%).

2. 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.

What can 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

3. 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," Gumbinger says.

But what 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.

4. 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.

Here's 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 makes sense.

5. 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.

Increasing 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.

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