Consumers Face Weakened Banking Power

For seven months prior to the release of the August Credit Power Index, a system that tracks the banking power of consumers by measuring the difference between loan rates and deposit rates compiled by the money management information source MainStreet and the financial industry data expert RateWatch, interest rates on CD were showing slight but consistent improvement.

However, the latest Credit Power Index data reveals a reverse in the trend. Meaning when the index goes up, it means that the interest consumers are paying on loans is significantly higher than the interest rate they are receiving on deposits.

“The national Credit Power Index may have hit bottom last month,” says the general manager of RateWatch, Rachelle Zorn. Her statement suggests that an end to the great consumer environment at banks may be close at hand.

However, the notion of what makes a “great environment” is entirely relative, as interest rates on savings products such as CD’s have been dismal for quite some time.

The current sorry interest situation can be blamed upon the government. “The low Fed funds rate is the real driver here,” says Maria Cappellano, a portfolio manager at investment management firm Eaton Vance who focuses on short term instruments, according to Main Street.

“It’s really an anchor for short-term CDs and deposits.”

Despite the fact that any return investor can expect to receive upon such CD’s and deposits are drowning, many Americans are choosing to take the safer route of wealth preservation over the riskier and much more precarious path of growth investing. What this means is that much of people’s money will continue to be shuttled into these rather unappealing but secure instruments.

“Do I want to have my money in prime money market funds with exposure to the European debt crisis? Or should I put my money in an FDIC-insured CD at the local bank?” Cappellano proposes that investors are asking themselves, as per Main Street’s reporting. “The mindset of consumers is that they’re looking for this cash to be safe, and they’re mostly concerned with capital preservation than an income base.”

The only bright side is for people looking to borrow money because, should they qualify, they could get a great rate on a loan at the moment.

Despite the grim return money put into savings accounts and Certificates of Deposit these days, it is important that consumers don’t abandon setting some money aside in order to establish an emergency fund.


Federal Reserve Dooms Higher Interest Rates For Savers

For those of us who are waiting for the Federal Reserve to increase interest rates that banks have to pay to borrow money, our waiting has gotten much longer, at least two years longer. Since the Fed’s rate-setting committee decided to hold interest rates at the current record lows until ‘at least through mid-2013’, we cannot see interest rates increasing on any investment vehicle such as Certificates of Deposits, Savings Accounts or any other investment that relies on the interest banks pay.

What does this mean for savers?

Banks will continue to borrow money at near zero percent interest and basically will have an endless supply of cash from the Fed. Why would a bank pay a higher interest to its savers/investors if it can get the same amount of money from the Fed at 0%-0.25% interest? Since these interest rates will be held at or near zero percent until at least mid-2013, savers get the short end of the stick!

What does this mean for mortgage rates?

The only good news about interest rates staying at record lows goes to those of us buying houses, cars or other items that require a loan of some type. The whole idea of keeping interest rates low is to encourage people to buy bigger houses and cars, and to encourage businesses to hire and expand their businesses. Neither of these scenarios has been working. The real estate market continues to struggle, more and more people are losing their homes to foreclosure and less people are able to qualify for a refinance on their current home mortgage, thus missing out on these record low mortgage rates.

The thought of keeping interest rates at record lows was to help the struggling economy, to help business create more jobs, to help the failing housing market, to increase consumer spending and to boost manufacturing outputs, but none have seen a boost or an increase in productivity. So why does the Fed keep doing the same thing by keeping record low interest rates until mid-2013? Not only does this do anything for the struggling economy but also hurts savers and investors alike. CD rates will continue to stay at or near record lows and mortgage rates will look to stay around record lows until inflation hits. We can see that both CD rates and Mortgage rates sticking around these low rates for a long time to come, unless if the US economy picks up, inflation hits or the Fed decides to change course.


Will Mortgage Rates Go Back Up in 2011?

As you well know mortgage rates have been extremely low for quite some time now.

Our nation has not seen mortgage rates hit these lows for decades.  And even when we think they could not get any lower mortgage rates continue to hit record lows.

This has caused as many people that can do so to refinance their home in order to save money.  The problem therein lies in the fact that these rates are a product of the week economy, an economy which was set into a landslide when the housing bubble burst into pieces within the last 2 years.


Unfortunately many people that really need to refinance their homes cannot because they do not have enough equity to meet the LTV (loan to value) requirements for a mortgage. (Learn More About Mortgages Here)

Quite a pickle… right?  Right.

On the other side of the mortgage coin people that are looking to purchase a home are in a screaming good position.  Housing prices are low, mortgage rates are through the floor and there plenty of houses on the market.

In these economically difficult times low mortgage rates have been a life line for many home buyers and home owners.

But are the low mortgage rates going to end?

That is an excellent question.  Is it going to be by the end of 2010?  Will mortgage rates stay low in 2011?

Here are 2 Large Factors to watch for to help determine if and/or when mortgage rates may head back up the mountain.

The Mid Term Elections:

Typically big election years can affect mortgage rates.  Well, maybe not directly but elections definitely effect consumer confidence, which effects the economy which will eventually trickle down to mortgage rates.   Rates do not tend to change much before the election, but we could see some changes or movement in mortgage rates if there is a switch in power.  A big change in Washington tends to either build consumer confidence or shake consumer confidence.  Both of which will have an effect on the economy and ultimately on Mortgage Rates.

How does the Economy Affect Rates?

Short term loans like credit cards and auto loans are directly affected by the Feds lower or raising of the prime interest rate. The Federal Reserve will move short term rates up or down in an effort to maintain the stability of the nation’s financial system. Economic ups and downs often spur the Feds to take action considering the financial system and mortgage rates.  These changes only directly affect short term loans, but indirectly effect long term loans like mortgages.  The Prime rate is an indicator of the strength of the economy.  Although not always the case, mortgage rates do often follow the prime rate either up or down.

Therefore if there is an economic up term in 2011 we may see the prime rate increase, which will be a sign of a bettering economy and mortgage rates may be soon to follow.

Then again we may not see a strengthening economy for some time, so these rates may be a little while longer.


CitiBank Credit Card Increases Interest Rate to 29.99%!

Guess what I just got in the mail today? A letter from CitiBank (South Dakota) telling me about the changes to my credit card account terms. This is what it says:

Dear ***** ******

We are making changes to your account terms.

To continue to provide our customers with access to credit, we have had to adjust our pricing. The terms of your account will be changing. These changes include an increase in the variable APR for purchases to 29.99% and will take effect November 30, 2009. As always, you have the right to opt out and pay down your balance under your current terms. If you opt out, you may use your account under the current terms until the end of your curent membership year or the expiration date on your card, whichever is later. At that time, we will close your account.

If you accept these changes, we have designed a program where you can earn interest back each month that can help offset the increase in your purchase APR.

Earn interest back every month

Here’s how – make your payment on time every month.

Each month you do, you will receive a credit on your billing statement equal to 10% of your total interest charge on purchase balance. This can help offset the increase in your purchase APR. Start earning interest back in December and January, and you will see the full credit on your statement no later than February 2010 and monthly after that.

If in any month you do not pay on time, you may not be eligible to continue to participate in this program.

We reserve the right to change or end this program with 30 days’ prior written notice. Please see the back of this letter for further details.

I’m not going to bore you with the rest of the letter but here are my thoughts.

29.99%, holy crap! Do the credit card companies really expect people to accept these terms? I know that I will be paying down that credit card by the end of the year and never using it again. Its very important that you DO NOT close your credit cards, no matter how upset you may be. Building a good credit history takes time and, well, a history. So if you close your credit card, then you lose that history for however long you have been building it with that particular card.

It seems like the credit card providers have forgotten about customer service, keeping their customers happy, providing a quality product, but instead it seems like they only care about the future credit laws that are coming out as early as December 1st. It will be interesting to see how this plays out. I have 8 credit cards (only use 3 of them and have very little debt with them), but I do expect to get more of these letters. Hopefully there will still be a credit card provider out there who actually cares for their customers and not charging the he*l out of them.

That’s it for now!