Say goodbye to low interest rates, hello to new costs

The days of low interest rates are officially numbered, says Chris Farrell, economics editor of Marketplace Money. So what does this mean for consumers, and how concerned should we be about rising interest rates?

Farrell suggests that the impact will be gradual. Credit card rates are already high, he says, and mortgage rates are linked to 10-year Treasury rates. "Nevertheless," he says, "we are at a turning point where savers will be better rewarded and borrowers will pay more."

"The higher interest-rate environment will benefit savers," he wrote in a piece for Forbes, "be a mixed bag for investors and make loans and credit cards more expensive for borrowers."

Farrell joined The Daily Circuit to discuss the outlook for interest rates and the best consumer strategies to deal with them. Also joining the conversation was Janet Bodnar, editor of Kiplinger's Personal Finance magazine.

Together, they shared tips for consumers on credit cards, interest rates and using capitalism to your advantage. Sure, lending companies have psychologists, anthropologists and other experts on staff. "These are very smart people, and in the end what they're trying to do, in order to make their money, is to convince you to borrow enough that you're always paying them," Farrell said. But "if you do pay attention, you can make the system work for you."

• Credit costs more than you think.

"Never underestimate the ability of the emergence of debt to mask ... the real cost of what it takes to borrow," Farrell said.

The home equity loan, he said, is a good example. "If you think about the middle class ... what got the middle class in trouble with their loans was not the first mortgage, it was the home equity loan on top of the first mortgage," he said.

Be wary of the home equity loan, he said, "because, in the end, you end up taking on too much debt — AND you can take it off your taxes."

"It really is that expensive."

In an economy in which most people aren't getting pay raises, in which layoffs have become just one more tool in a manager's toolkit and uncertainty is the rule of the day, he said, consumers should be thinking very deliberately about debt — and the debt they're actually taking on.

It's true for home financing and it applies to those everyday finance decisions, too, the ones that appear on credit- and debit-card bills.

• Use rewards cards deliberately.

Many credit cards offer rewards — cash back, bonus points, gift cards — according to specific types of spending you do with the card. "The idea," Bodnar says, "is to get you to buy as much on credit as you can without getting into trouble."

But sometimes card rules restrict reward spending to short-term purchases, like groceries or gas. "Do you really want to charge your supermarket purchases on a credit card? You're going to use it. You're going to eat it the next day," Bodnar said.

"My consumable products, I like to pay cash for," Bodnar said. "I don't like to put those purchases on credit card. On the other hand, if you use that card and you pay it off every month, you can rack up a lot of points.

"It depends on how you manage your money personally ... and whether you think it's a good thing or a trap."

• Deal with customer-service problems locally and personally.

If you run into a dispute with your lender — additional fees appear on your bill, your rate's gone up inexplicably, etc. — it's best to address it as personally and as locally as possible.

"The first thing to do is to get back in touch with the issuer," Bodnar said. Talk to a real person. Don't settle for getting stuck in the press-a-button customer service recording loop. Ask for a supervisor. Elevate the issue. Sometimes, she said, you do actually get satisfaction, especially if you're a longtime customer.

"If you can't, especially if that doesn't happen, the Better Business Bureau is a good way to go," she said. Typically, the BBB is based locally, not in Washington, D.C., and not wherever the headquarters of your credit card company might be.

The more personal and the more local you can keep your conversations, your requests and your complaints, she said, the better. It's very likely that your credit card issuer doesn't want to be at the top of any complaint list.

There's always another option, Farrell said, particularly if a company's services aren't up to par with what you need: Cancel your account.

"Part of what we're hearing is just bad customer service," he said. "That you can shop around more and find someone who's going to have a better product."

Switch to a credit union or a local bank. Shop around. It's an effort, he said, but worth it, especially if you're not being treated well by your current credit card company.

And if you're one of those consumers who pays off your credit card bill every month, don't get bogged down by the question of the interest rate when deciding on your new card. The interest rate, Farrell said, isn't that big a deal, if you pay off your bill every month.

And don't worry about canceling your card. It won't hurt your credit score in the long run. "It dings, but does not destroy your credit score," Farrell says. The only time to pause before canceling a credit card account is just before a big purchase — a house or a car, for instance. Keep the card, Farrell says, through the end of the transaction, then feel free to close the account. "Go ahead and do it," he said, "and then continue to borrow off a credit card, pay it off in full, borrow, pay it off in full. ..."

• Beware the prepaid cards.

They're marketed for their convenience — people don't want to take on a lot of debt, so a prepaid card seems a logical option — but watch out for the fees that are easy to miss.

"You feel good about yourself: 'I can't put a balance on this card,'" Farrell said. "But, actually, your $100 [card] is $98. Or $95."

Bodnar often writes about kids and money. She's seen these cards marketed to parents as a way to teach kids about responsible spending and money management. But really, she says, all she sees is red flags. There are transfer fees, fees for leaving the card idle for a while, maintenance fees... .

"Here's an example of people trying to do the right thing ... but depending on who's marketing it, it's a really bad deal for the consumer," Farrell said. "And the basic advice is: Run. Don't walk."

The bottom line, when it comes to borrowing: "With credit cards, you really can't use credit cards to live above your standard of living," Farrell said. "Eventually there's going to be a day of reckoning there."

LEARN MORE ABOUT INTEREST RATES AND CONSUMER STRATEGY:

• Smart Money Moves, Now That Interest Rates Are Rising
I think it makes sense now to reduce your exposure to long-term bonds to avoid potential losses. Park that money in shorter-term fixed income securities, like money market funds and bond funds. Remember, bonds will become attractive again. If you wait a bit for rates to rise further then invest in bonds and bond funds, you'll then be able to benefit from their higher yields. (Chris Farrell, Forbes)

• It All Depends on Your Portfolio and Tolerance for Risk
The big wild card in all of this is that rates have been going down for so long that we don't know where the excessive risks have been taken. Some strategies and some firms could face more intense pressure than what has been experienced to date. And if rates keep rising, it's likely that the stock market will show greater weakness than it has so far. (Tom Brakke, Wall Street Journal)

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