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Money Talk

Don't Lose Your Footing as Rates Rise

Credit card interest is inching upward with each Fed move, and so are yields on bank CDs.

May 12, 2000|LIZ PULLIAM WESTON

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 http://www.bankrate.com or http: //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.

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