How to protect finances as interest rates go up

/ Source: The Associated Press

Q. Is there anything I can do with my personal finances to blunt the impact — or take advantage — of rising interest rates?

A. Absolutely.

Consumers with variable rate debt are particularly vulnerable to rising interest rates, whether that debt is tied to a credit card, a home equity loan or a mortgage.

A good idea, experts said, is to refinance debt to lock in fixed rates before the cost of borrowing money goes up.

For example, the average fixed rate on a home equity line of credit these days is about 7 percent, compared with about 6 percent on adjustable rates. But a year from now, depending on how aggressively the Federal Reserve raises rates, the adjustable line of credit may be set well above 7 percent — and a year after that, perhaps even higher.

"At the very least, have a plan in place now so that if the rate jumps you know what you're going to do," said Stephen P. Wetzel, a financial planner with Prometheus Capital Management Corp. in Yardley, Pa.

On Tuesday, the Federal Reserve raised its key federal funds rate by one-quarter percentage point to 2.75 percent, marking the seventh increase of that size since June 2004.

With credit card debt, locking in fixed rates is not an option and the issuer of the card has considerable flexibility to change the terms at any time, sometimes with as little as two weeks notice.

So when it comes to plastic, "the best defense is a good offense," said Greg McBride, a financial analyst with in North Palm Beach, Fla. "Pay down any credit card debt as aggressively as you can."

While higher interest rates are a potential threat to borrowers, they present opportunities for savers.

The returns on money-market funds and CDs are limited when compared with the stock market — but improving considerably. And, they offer flexibility to take advantage of better opportunities arise.

The average yield on a 1-year CD is now approaching 2.5 percent, up from just 1.1 percent a year earlier, McBride said. But a year from now, yields on 1-year CDs could be 4 percent or more.

But Wetzel had one piece of advice: "Stay away from those five year CDs that are starting to look sweet."

Although the returns are better than a 1-year or 3-year CD now, in a few years the current yield on a 5-year CD may not look like such a good deal. Wetzel said the best strategy is stick with short-term CDs so that, as they mature, the money can be reinvested into successively higher yielding CDs.

Finally, experts said people should shop around for savings or money market accounts that offer more attractive yields. ING Direct, for example, is an online bank that has a savings account that yields 2.60 percent a year and requires no minimum deposit.

"It's not a teaser rate, I've had my personal and company emergency funds there for years," he said.