Easy Credit and Low Interest Rates - What Next?

The state of our economy is robust, dynamic, strong and resilient. These are the terms I’ve heard lately used to describe the American economy, a system we all depend on and participate in. But there also seems to be an underlying discomfort, a deepening unease about the future. Big changes have already taken place and more are on the way. How we as individuals adapt to these changes will determine our future well being or lack of it.

Like many Americans, I’m in the boomer generation. My father’s generation was educated in part by the great depression. They learned the importance of saving; for the most part they learned to live within their means. Credit was hard to get and was considered expensive at the time. Many of the previous generation’s workers enjoyed retirement pension plans, and could count on social security as a safety net to supplement retirement income.

In contrast today credit is easily available and free for six months. How many credit card offers do you get in the mail every week? Even scarier how many do your kids get? While it’s nice to have the lowest interest rates in recent history, the situation has created a generation of spenders not savers. Today we enjoy big houses, big SUV’s and a big mountain of debt. Many in today’s work force have seen reductions in, or a complete loss of the old type “pension plans”. We have been encouraged to save for ourselves through company sponsored retirement plans like 401-K plans. We also have available Individual retirement accounts (IRA’s). But it’s up to us to understand and use these plans properly. The burden of retirement has shifted from companies and institutions to you! You are responsible your retirement – the safety net has been spent, the pension plan of fifty years ago fell victim to global competitiveness.

In general, most Americans are doing a poor job of dealing with the changes we are facing. Rather than learning to save, we have learned how to pay off one credit card with another. We have learned how to use cheap credit to buy more house, more car, more stuff than any other generation in history. As a result, the boomer generation has more household debt, more personal bankruptcy, and is less prepared for retirement than any previous generation in history. No wonder we’re uneasy about the future. Many of us are just not prepared.

Here are a few things that we do know. 1) Congress has spent your social security money. If you’re under 55 Social Security will be cut from current levels. I would guess that the younger you are the bigger the cut. 2) With a rising federal budget deficit, taxes have to rise at some point or new taxes could be imposed. 3) Interest rates on consumer credit and home loans will come under pressure, meaning at some point interest rates will rise.

How will you handle higher taxes, higher interest rates, and a lower monthly SS check in retirement? One thing becomes very apparent, planning for your financial future has never been more important. With all the problems we face, we also have more opportunities than any other generation. Use them well, your future depends on the decisions you make

Tax Freedom Day

Tax Freedom Day arrived on Sunday, April 17th this year. That’s when we stop working for government and start working for ourselves. For the average worker, all of the earnings of the first 107 days pay taxes to the federal, state and local governments. Starting April 18th, we are free -- at last -- to take care of our own family’s needs.

TIDBITS - Free Credit Report

As a result of the Fair Trade and Accurate Credit Transactions Act (FACT), residents of Illinois are now eligible to get a free credit report annually from each of the three major credit bureaus: Equifax, TransUnion, and Experian.
Due to rapidly rising incidence of identity theft, you should check your report annually. Knowing your credit score and how to improve it may be valuable if you plan to apply for credit in the near future.
In today’s world, your credit report can have an impact on your employment prospects, rates on loans, insurability, and the rates on your current debt. Many credit companies have a clause wherein your rate can rise to the maximum if your credit score changes dramatically. This can seriously impact your budget and your life.
You can get your free report by going to www.annualcreditreport.com, or by calling 877-322-8228. Make sure you get a report from each of the three major credit bureaus. Your report is free, but there is usually a minimal charge for your credit score. The typical charge is between $5 and $10 for the score.

The Impact of Rising Interest Rates

It seems like everywhere you turn these days, folks are talking about how interest rates are on the rise. You see it in mortgage rates, as they have fluctuated upwards over the past several months. You hear it on the news – how Mr. Greenspan and his group are calling for a “tightening” (don’t they really mean choking?) mode. So what does this all mean to you and me?

Calling the direction of interest rates is a wild guess at best most times, and even the experts tend to disagree. But, since Mr. Greenspan and company are indicating that they intend to continue increasing their target rates, and since the economy is still shaking off a hangover, plus we continue to see fuel prices on the climb, it’s pretty certain that the near future rates we’ll see will be higher than what we’re seeing right now.

But the news isn’t all bad. Increasing interest rates mean that businesses are willing to pay more to borrow money, because prospects for revenue are increasing. Inflation rising, to a degree, is a good thing – it forces our economy to grow. Following are some of the ways that the increase in rates may impact you – some good, and some not so good:

Credit Card Debt – all of those low-interest credit cards that have variable rates tied to the prime rate are going to increase their rates, you can bank on that one. Now is the time to do what you can to reduce or eliminate any unsecured debt – meaning credit cards and personal loans – because you’ll not likely see rates at these levels again anytime soon.

Mortgages – If you locked in a fixed rate over the past couple of years, good for you! You’re in the catbird’s seat. The rise in interest rates should have no affect on your mortgage at all.

If, however, you’re sitting on a variable rate mortgage, you’ve got a decision to make: Should you refinance to a fixed rate loan, or sit tight and ride out the increase in rates? I’ve never been a fan of variable rate loans in general, so you can guess what my recommendation is here – go for the fixed rate, and do it now before the rates rise!

The one instance where a variable-rate loan might make sense is a situation where you absolutely know you are only going to be in the home for a period of time no more than the first adjustment term. In these cases, you’re actually just taking a fixed-rate loan of a very short duration that has been amortized over a longer time period, which makes good sense.

There are some new kinds of mortgages on the market these days that could suit your situation, called “hybrid adjustable rate mortgages”. With a hybrid ARM, your rate is fixed for a longer period of time than a traditional ARM, even up to as much as ten years. These loans could be just the right thing for your conditions.

Home Equity Line of Credit (HELOC) – if you have one of these at a variable rate, and you’re not intending to get it paid off fairly soon (within the next 12 months or so), you may want to consider changing it to a fixed-rate loan, in order to lock in your rate.

Auto Loans – usually these are at a fixed rate, so current loans shouldn’t be impacted, but if you’re considering purchasing a new car and financing it, you might want to act now before rates increase.

Stock Market – the jury is still out on whether or not a rise in interest rates is good for the stock market. If the economy is in expanding mode, it should be good for the market. However, if the interest rate increases are too much too fast, it can have a dampening affect on any attempts at a rally.

Bond Market – quite often, an increase in rates can have a damaging affect on the bond market. Now is the time to consider reviewing your bond portfolio and perhaps shortening your overall duration, in order to take advantage of the looming potential increases in rates. The rule of thumb is that an increase in rates has a tendency to impact longer-duration bonds to a greater extent than shorter-duration bonds and portfolios.

CD’s – typically, you’ll begin to see rates increase in the CD market, so if you have CD’s maturing soon, or you’re looking to add some money to your CD portfolio, now would be a good time to implement a laddering strategy. A ladder is where you have, for example, your CD money split up between three CD’s of differing maturity, such as one year, three year, and five year. As each CD matures, you reinvest it for five years, thereby reducing your exposure to interest rate increases while still getting CD-rates (versus savings account rates).

Treasury Inflation-Protected Securities (TIPS) – these bonds are a great place to take advantage of both the increases in interest rates as well as inflation. They are comparable in yield to CD’s at the present, and are as secure as the federal government.

In addition to the above-listed items, there are some benefits for folks that are intending to generate charitable trusts as a part of their estate planning activities. In some cases lower rates are in your favor, while rising rates favor other strategies. It gets fairly complicated, so if you’d like to discuss these options at any length, give me a call and we’ll talk it over.
So now, hopefully you’ve picked up a reason or two to pay more attention when the nightly news reports that the Fed is planning to increase rates, and perhaps you’ve got a couple of more items on your “To Do” list now. I hope that this list has helped you to face the coming increases in rates, knowing that you’ve done what you can to both shield yourself and to take advantage of the situation where you can.