Don’t Lose Your Footing as Rates Rise
It’s better to be a saver than a borrower when interest rates are rising, but both can benefit from good timing and a little comparison shopping.
If you’ve been playing musical chairs with your credit card balances--transferring your debt from card to card to take advantage of low-rate offers--you may have noticed lately that fewer credit card companies are willing to play your game.
Card issuers have cut back sharply on extremely low-rate teaser offers and on the number of low, fixed-rate cards issued, replacing them with higher, variable-rate deals for most cardholders, said Greg McBride, financial analyst for Bankrate.com, a financial research firm.
The drying-up of low-rate offers comes at a bad time for borrowers. The Federal Reserve is expected to boost interest rates again when it meets Tuesday, and previous Fed hikes have helped increase the average interest rate on standard credit cards to a four-year high of 16.57%, according to a Bankrate.com survey.
Higher interest rates have a positive flip side for savers, of course; average one-year certificate of deposit yields are at a five-year high of 5.62%.
The higher rates seem to be prompting a resurgence in CD popularity; Federal Reserve figures show small CD holdings nationwide have risen to $983 billion from $953 billion at the end of 1999.
Savers who shop around can find one-year CD yields exceeding 7%, and rates are likely to go even higher as the Fed keeps pushing its key rate up. (For a list of high-yield CDs, visit https://www.bankrate.com or https: //www.imoneynet.com.)
That’s good news for savers who have “laddered” their CDs to mature every few months, a strategy that allows them to take advantage of higher rates while protecting most of their CD portfolio should rates eventually fall, said Peter Crane, managing editor for IMoneyNet Inc., a savings and investment research firm.
But instead of locking up a CD now, Crane says savers might consider putting any new money in a money market fund for a few months, until the Fed appears finished with raising rates.
“Stay short. You want to wait until the Fed is almost done hiking rates” before investing in longer-term CDs or other interest-sensitive investments like bonds, Crane said.
Savers should also compare CD yields to those of similar maturity U.S. Treasuries to see which is a better deal after taxes. Both Treasuries and CDs are subject to federal income taxes, but Treasuries escape local and state taxes.
Right now, the highest-yielding one-year CDs hover around 7.4%--a better yield, even after taxes, than one-year T-bills currently yielding 6.3%.
Although there is a always some risk in trying to predict interest rates, there is no risk if borrowers save money by shopping for better deals, although their opportunities may be more limited.
After flooding mailboxes with 3.9%, 2.9% or even 0% offers, some of the country’s largest credit card issuers have abandoned very low teaser rates, McBride said.
The lowest-rate offers “didn’t generate the profits or foster the customer loyalty the lenders had hoped for,” McBride said.
Instead, consumers “surf” their balance from card to card, changing issuers as soon as the introductory rates expired.
Some big issuers, including Bank of America and American Express, hope to end the surfing by offering consumers a “fixed” 8.9% rate on balance transfers that lasts until the balance is paid off. New purchases accrue interest at a higher, variable rate after a six-month introductory period.
In general, single-digit fixed rates are becoming harder to find since credit behemoth First USA pulled the plug on its 9.9% rate. Other issuers, including Fleet Financial, quickly followed suit, although both Capital One and Bank of America still have limited 9.9% fixed-rate offers.
Very low-rate offers also still exist, but they tend to be reserved for borrowers with the best credit, or to arrive with significant strings attached. NextCard offers a choice between a 2.9% variable or 8.9% fixed rate, but the offer and any subsequent variable rates depend on the applicant’s credit rating.
Most of the lenders still advertising very low rates substitute a double-digit rate after the introductory period expires. Among the better deals for people with average credit are a 2.9% offer by Bank One of Chicago and a 3.9% introductory rate by Security First of Atlanta. Both rates expire after six months; Bank One follows with a variable rate that’s currently 15.4%, while Security offers a fixed 12.9% rate.
Some card issuers tack on a 3% fee to transfer a balance, an added charge that could offset the benefits of a lower rate, said Robert McKinley, president of credit card research firm CardWeb.com.
“Consumers need to really read the fine print around every balance transfer,” McKinley said.
Borrowers who grab a low rate now may face an even worse interest rate environment when the deal expires, McBride warned. Issuers are unlikely to expand their low-rate offers, and the average card rate is likely to rise. What’s more, carrying a large balance and frequently opening new credit accounts can hurt a borrower’s credit score, which can make it difficult to qualify for the lowest rates in the future.
So how can consumers cope? Whenever rates are rising, the best strategy is to pay off debt as quickly as possible, and to avoid adding new debt.
Here are some ideas on how to reduce your interest costs and get debt-free faster:
* Make card payments on time, because late payments typically cancel the introductory rate and trigger higher interest costs.
* Keep new purchases to a minimum, and consider using cash rather than plastic.
* Those taking advantage of a balance transfer deal should be especially cautious about making new purchases with the same card. Payments are applied to the lowest-rate balance first, which means those who use a card for both transfers and new spending could find themselves carrying high-interest debt after the introductory rate expires.
A better strategy would be to keep one low-rate card for balance transfers and another card with no annual fee, to be paid in full each month, for any new purchases.
* Those who can’t pay off a balance quickly might be better off searching for one of the lower fixed rates or considering other strategies, such as an unsecured personal loan or a home equity loan.
One place to look for lower rates is your local credit union. Credit cards issued by member-owned credit unions tend to have lower rates and better terms than those issued by national banks and thrifts, McBride said. * Borrowers determined to pay off their debt may consider a home equity loan--but with extreme caution. Interest on home equity loans is tax deductible, but falling behind on payments can put your home at risk.
If a home equity loan is your best choice, however, it may make sense to apply now rather than when your teaser credit card rate expires
in a few months. Like many other rates, interest costs on home equity loans, which currently average 9% to 10%, are likely to rise.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. She can be reached at liz.pulliam@latimes.com.
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Better Yields
For savers, the Federal Reserve’s campaign to raise interest rates has generated heftier returns. Average national CD yields:
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May CD term 1999 Current 6-month 4.23% 5.19% 1-year 4.62 5.62 2 1/2-year 4.76 5.96 5-year 4.97 6.10
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Source: imoneynet.com
