savings

Get Ahead of Rising Interest Rates

It's time for savers and borrowers to rethink their strategies.

After years of holding short-term interest rates to near zero, the Federal Reserve is expected to orchestrate a long-anticipated lift throughout 2016. Rising rates swing a dual-edged sword: Although savers can look forward to more-attractive yields on their cash, borrowers must brace for a higher cost of taking on debt. Still, the pain (and gain) will be minimal for some time as rates only inch upward.

On federally insured savings accounts, “there will be incremental improvement in what are miserly returns now,” says Mark Hamrick, an economic analyst at Bankrate.com. Look for Internet-based banks, which already boast many of the top-yielding accounts, to lead the way in pushing up rates. You can search for the highest rates at www.depositaccounts.com.

You’ll be best positioned to pounce on enticing rate offers if you keep cash in easily accessible savings and money market deposit accounts. Long-term certificates of deposit currently pay better rates—recently, as high as about 2.5% on a five-year CD, compared with half that rate on top-yielding savings accounts.

But with standard CDs, you’re stuck with the same rate for the full term. And if you withdraw money early, you’ll typically face a penalty of several months’ interest. If you do invest in CDs, build a “ladder” by putting money in CDs of various terms so that you’ll have a steady stream of funds to reinvest as rates increase and the certificates mature.

Borrowers who have debt with a variable rate, including most credit cards and home equity lines of credit (HELOCs), will see their rates rise in tandem with their underlying benchmarks, such as the prime rate. But unless you’re carrying a heavy load of debt, the resulting increase in your minimum monthly payment will likely be limited to a few dollars each time the rate edges higher. Still, it’s wise to pay down as much as possible now. Consider transferring your credit card balance to a card with a lower rate; issuers may pull back on lengthy 0% introductory periods or increase the fees for balance transfers as rates go up.

HELOC borrowers who are approaching the end of an interest-only payment period could be in for a rude awakening if they have to shift to payments of interest plus principal at the same time that rates rise. Pay extra now, if you can fit it into your budget. You may be able to convert all or a portion of your variable-rate HELOC balance to a fixed-rate home equity loan. But a home equity loan recently averaged a fixed rate of 6.18%, compared with an average 5.06% on a variable-rate HELOC, according to mortgage research site HSH.com. So a switch may not be worthwhile if you can retire the debt in the next few years.

If you have a mortgage, explore the options for refinancing while rates are still scraping bottom. (For more, see Housing Outlook, 2016.) That goes for car loans, too. Pentagon Federal Credit Union recently offered an APR as low as 1.49% to refinance a three-year car loan. For prospective borrowers who are well positioned to take on a loan, now is the time to lock in a record-low rate. But don’t worry about missing the boat if you’re not ready to jump. Rate hikes will be modest and gradual, and they are starting from rock bottom. “Even if rates were to go up a point or two, we would still be in very favorable territory, historically” says HSH vice president Keith Gumbinger.

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