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Consumer Watch: Use market turmoil to stand back, study your investments, debt

Aug. 18, 2011 - 11:28AM   |   Last Updated: Aug. 18, 2011 - 11:28AM  |  
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As you watched the news of Standard & Poor's downgrade of the U.S. credit rating on Aug. 5, and then the stock market free fall three days later, hopefully you didn't rush into any financial decisions.

"The U.S. has always had a pristine credit rating. This downgrade by S&P is a first by any credit rating agency," said June Walbert, certified financial planner for USAA Financial Planning Services.

And it doesn't mean that AA+ is not a very good rating, she said, noting that other credit agencies have not followed suit.

What does this mean for you? Theoretically, if the government has to pay higher rates to borrow because its credit rating has been downgraded, "it could trickle right down to Joe's wallet, especially when it comes to a fixed mortgage," Walbert said.

However, at this point, that has not happened. On the positive side for consumers, the Federal Reserve, our nation's central bank, has announced that it will keep interest rates low for the next two years, which is some comfort. That will continue to impact short-term rates, such as credit cards and savings rates. Still, no one knows what might happen after that — and even within the next two years, there could be more rough water ahead.

The recent turmoil that has engulfed the markets is a good opportunity for all of us to step back, assess our investments and loans, and take steps just in case more turbulence lies in store.

• If you have variable interest rates on loans — like most credit cards and some home equity loans — it will cost you more if interest rates increase. If you don't pay off your credit card balance every month, start chipping away at that balance, because it could cost you more.

Gerri Walsh, vice president of investor education for the Financial Industry Regulatory Authority, advises everyone to carefully check monthly credit card and loan statements for any changes in terms such as interest rates.

• If you have a variable-rate home equity line of credit and can't pay it off, consider refinancing it into a fixed-rate home equity loan. The interest rate will probably be higher initially, so it's something you have to weigh, since no one can predict for sure what's going to happen to rates.

If you don't refinance, start pumping more money into paying off that home equity line of credit.

• Now, more than ever, avoid adding to your debt.

• Consider refinancing your car to a lower interest rate. If interest rates do rise, your window of opportunity will be long gone.

• Consider refinancing your house, if you have an adjustable rate mortgage or an interest rate that's 6 percent APR or more. Refinancing is advisable if you can shave one percentage point or more off your rate, Walbert said.

FINRA'S Walsh had a note of caution: "If you're moving in a couple of years, as military families often do, do the math. Even with the lower interest rate, you may not recoup the cost [of refinancing fees] in a couple of years."

• As for your stock market investments, don't try to time the market, experts advise. "You should especially avoid selling into this market. Hang on. Take a deep breath, and don't panic," Walbert said. "Don't stop investing. Keep those allotments going to your Thrift Savings Plan on a regular basis."

When stock prices go down, you're buying more shares of the underlying funds with the same amount of money, so when they go back up, you reap the benefit.

• If interest rates do rise, it could mean an increase in what you earn on savings and certificates of deposits. Those earnings are really low right now. As of Aug. 9, according to Bankrate.com, the national average for a one-year CD is 0.44 percent APR; for a five-year CD, it's 1.61 percent APR.

The goal is to sleep better at night. But as Walbert noted, even through terrorist attacks, wars, devastating natural disasters and other cataclysmic events, over the course of history, "every time, over time, the market has come back."

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