Claudia Buck

Plan ahead for higher interest rates

With Wall Street’s recent gyrations, consumers can’t find much certainty in their financial lives.

But one thing seems assured: Higher interest rates are coming.

For the last several years, U.S. interest rates have hovered at exceptionally low levels. That’s been discouraging for those with savings accounts paying pitful returns. But for borrowers – those with mortgages, car loans and credit cards –it’s been a huge boon.

Those days are numbered. As unemployment falls and the economy stabilizes, Federal Reserve Chief Janet Yellen has said that sometime in 2015, the Fed will start nudging interest rates back up. Earlier this month, in an interview with The Sacramento Bee, San Francisco Federal Reserve Bank CEO John C. Williams predicted that interest rates could climb by mid-July.

Of course, it all depends on how well the U.S. economy does. In the meantime, say financial experts, consumers can get ready for higher rates. Here’s how:

Slim down credit cards

Although U.S. credit card debt fell during the recession as consumers trimmed their spending, it’s been creeping back up. “It’s typically the most expensive debt that consumers carry,” said Greg McBride, senior financial analyst for Bankrate.com. And for many consumers, it’s “your biggest exposure” when interest rates start inching up.

Currently, Bankrate said the average annual percentage rate (APR) for variable-rate credit cards is 15.66 percent. To whittle down credit card debt, start by attacking the card with the highest interest rate.

“The key is to pay off the highest-interest card first. While you do that, pay the minimum payment on the other cards,” said Bruce Kajiwara, a certified financial planner and financial adviser with Kajiwara Wealth Advisors in Sacramento. “It’s a sense of accomplishment to get one card paid off. Get it done.”

He said some consumers utilize “credit card surfing,” opening a zero-percent card and transferring all their existing card balances to it. When the free interest rate expires, say after six months, they open another zero-percent card and continue surfing onto the cheapest balance.

But Kajiwara warns that this strategy is risky. “It doesn’t necessarily mean they’ll get out of the credit card spending cycle,” he said. “The only way to get out of that cycle is to control new spending.”

Lock in your mortgage

If you’ve got a fixed-rate mortgage, congratulations. But if yours is adjustable, your monthly mortgage payment could start showing some weight gain.

Consumers with adjustable mortgages should seriously consider refinancing to lock in a fixed rate, say financial experts, even if it means taking out a new loan with a slightly higher interest rate. “It’s a bite-the-bullet payment now, but knowing that it’s never going to change on you ever again,” said McBride.

If you’ve got an adjustable loan, use a mortgage calculator or talk to your lender to figure out what your higher payments will be as rates adjust. “You don’t want to be blindsided,” McBride noted.

When considering whether to refinance, you need to stay in your house long enough to offset the cost of refinancing, noted CFP Kajiwara. “If it costs $5,000 to refinance and you’re only planning to stay in the house a year, it’s not beneficial to refinance. But if they’re going to stay in their home, I encourage (clients) to refinance and secure a lower rate loan now. It’s when interest rates go back up to 6-8 percent, we’ll wish we had a 4 percent.”

If you’re not sure, talk with your lender or CPA about what’s the best move.

Homeowners should also be prepared if they’ve got a home equity line of credit, or HELOC, which can run from 5 to 15 years and lets homeowners borrow varied amounts at variable rates. When the loan period ends, the HELOC converts from interest-only payments to interest plus principal.

If you’ve only been making interest-only payments, beef up the payments now so you won’t be hit as hard when the loan period expires.

For those who don’t do anything with their existing variable mortgage rate, McBride said, “It could become like water torture, repeatedly working its way higher over the years.”

Consider consolidating

It doesn’t always pay off, but consolidating multiple credit card or student loan payments, for instance, can reduce what you pay in interest. By rolling all of your smaller loans into one big loan, you can typically stretch out the repayment term and get a lower interest rate.

Consider transferring multiple credit card balances to a single card with a low rate.

“There are straight, bare-bones credit cards that usually have lower maximum interest rates than cards with bells and whistles, like mileage or cash back,” said Paul Granucci, financial solutions advisor with Merrill Edge in San Francisco.

With student loans, Granucci said, ask if you can get into one with a low interest rate cap. But don’t necessarily roll multiple student loans into one jumbo loan, he said, because you may lose the lower interest rates already in hand. Instead, set up automatic payments from your checking or savings account, so you can religiously pare down the loan debt.

“Interest rates can’t stay at zero forever. Doing things now to prepare for (increasing rates) is a wise move,” Granucci said.

Call The Bee’s Claudia

Buck at (916) 321-1968 or

read her Personal Finance columns at www.sacbee.com/claudiabuck.

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