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CHICAGO (Dow Jones) -- If you're a borrower with a variable-rate line of credit, the Federal Reserve's two-year campaign of raising interest rates has no doubt caught your attention. After each of 17 hikes, the latest coming Thursday, banks have boosted their prime rate, the benchmark to which most variable loans are tied.
That means many borrowers are now paying an interest rate four percentage points or more above their starting rate. But depending on their loan type, consumers feel the effect of hikes at different times.
Interest rates on variable-rate home-equity lines of credit, for example, tend to go up shortly after the Fed makes a move, said Greg McBride, senior financial analyst for Bankrate.com. The repricing of student loans, on the other hand, happens less frequently: The interest-rate adjustment for these loans on July 1 took into account increases over the past year, causing many borrowers to consolidate before June's end.
But managing your debt in this financial climate doesn't necessarily mean securing fixed rates all around, even in the places the Fed hikes have hurt the most -- credit cards and home-equity lines of credit.
Pressure on plastic
When it comes to credit cards, "variable interest rates are not your friends," said Catherine Williams, vice president of financial literacy for Money Management International, a nonprofit, community-service organization that provides financial guidance.
"What surprises me is that folks shop for bargain prices and they don't shop for bargain interest rates," Williams said. Then, card users forget when the honeymoon ends on their introductory rate. "They just know that they had a nice, friendly rate when they came on," she said.
Williams recommends finding a fixed-rate credit card by comparing deals online, with an important caveat: "'Fixed' only means 'fixed' until the credit company says it will change it." Credit-card companies have the power to increase interest rates on their fixed-rate cards, and can even switch them to variable-rate cards.
It's this point that prompts McBride to make a somewhat different suggestion: Shop for the lowest interest rate -- with a blind eye to whether it is variable or fixed -- then accelerate your payments to pay the debt down altogether.
"You can't blame people for assuming 'fixed rate' means 'fixed rate.' In the world of credit cards, it doesn't work that way," McBride said. You're better off taking advantage of a low variable rate, then "put the hammer down and start knocking down that balance," he said.
Singing the home-equity credit blues
Two years ago, the prime rate was 4%, said Anthony Hsieh, president of LendingTree.com. Today, it is higher than 8%.
Consider this: For a $100,000 loan, a 4% interest rate meant an interest payment of $4,000 annually and $333 a month, Hsieh said. At today's rates, that interest payment more than doubles.
"If you planned for that two years ago, you're OK," Hsieh said. If you haven't, you're probably experiencing sticker shock.
Switching to a fixed rate wouldn't really help matters now, considering most of the damage already has been done, McBride said. After raising rates 17 times, the Fed doesn't have many moves left, he said.
"If you've ridden the interest-rate elevator from 4% to 8%, now isn't the time to lock in a fixed rate," McBride said. A fixed rate wouldn't be much lower than the variable rate, he said. Borrowers who refinance a mortgage and home-equity line of credit into one loan could get the rate lower, but they would also stretch out the repayment period.
Instead, look beyond the rate, keeping in mind that a home-equity line of credit offers flexibility that a fixed-rate loan doesn't, McBride said. With the credit line, you can borrow what you need when you need it rather than getting one lump sum and making set payments for a specific period as with a fixed-rate home-equity loan, he said. You also have the ability to make smaller, interest-only payments in months when money is tight.
If you're looking for a loan today, rather than variable-rate credit lines you might want to opt for a cash-out refinancing of your first mortgage or a second mortgage fixed-rate product, as Hsieh said many people are now doing.
And if you're shopping for a new mortgage, lock in a fixed rate if possible, McBride said. "Fixed mortgage rates are currently lower than what your adjustable rate will jump to if you hold that loan past the reset," he said.
Silver lining to Fed hikes
Fed rate hikes have a modest impact on auto loans, the other big consumer borrowing cost, McBride said. Even if the interest rate for a five-year car loan went up one full percentage point, payments on a $25,000 car would go up $12 a month, he said.
"Higher interest rates won't cost you nearly as much as the higher gas prices," he said.
Even better: Money market accounts and certificates of deposit become better investments with the Fed hikes, McBride said. Without investment risk, you can earn a 5% return or better using these tools.
"But don't settle for what the local bank is giving you. Shop around to get the best returns," he said.
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