Greg McBride Of Bankrate.com

Without an emergency savings fund to draw on in case of unplanned expenses, the consumer is much more likely to go into debt should those types of expenses arise. -- Greg McBride

Greg, what is Bankrate.com, how long have you been with Bankrate.com, and how did you get involved in finance? Bankrate.com is the Internet's leading consumer banking marketplace. It covers topics such as banking, investing, taxes, and small business finance. I've been with Bankrate.com as a financial analyst for about two and a half years. Before that, I was in consumer lending. I've been interested in finance for a long time, and working in this field permits me to do what I enjoy. Currently, I'm a candidate in the Chartered Financial Analyst (CFA) program through the Association of Investment Management and Research (AIMR).

What do you do for Bankrate on a day-by-day basis? I spend a lot of time monitoring trends taking place in the marketplace, coast to coast, on financial products that consumers run into in their everyday lives. Most of the products are related to banking -- that is, things like credit cards, mortgages, and various consumer loan products, as well as CDs, money market accounts, and cash investments.

Let's talk about certificates of deposit (CDs). Their rates have been declining for a while. When did interest rates really start their downward momentum? And what do you think might have been contributing to that downturn over the last couple of months? The gradual pullback from what had been five-year highs in the middle of last year began around August of last year, but the real downward momentum started in December. That was when it became apparent that the economy was slowing and the Federal Reserve would need to cut interest rates at some point in 2001. As the timetable for those rate cuts moved up, yields began to drop faster. The yields on CDs are strongly correlated with the timing of monetary policy actions. These actions include Fed rate hikes and cuts. The longer-term yields tend to move in anticipation of Fed rate action, whereas the shorter-term yields react when those actions become reality.

Working Money ran a story about using CDs as an emergency savings plan. What are some of your thoughts in terms of how a person might go about setting up an emergency savings plan? Consumers should view CDs as a supplement to a necessary liquid savings fund. The general advice is to maintain emergency savings equal to three to six months' living expenses. As a rule of thumb, keep liquid the first three months of expenses that would cover you in the event of a job loss or some catastrophic event. Keep this in a high-yielding money market account where, again, you can earn yields that outpay the rate of inflation -- yields that are among the highest available nationally. Anything you have beyond that three-month horizon can be invested in, say, a three-month CD, where you can earn a yield premium by locking it up for a period. At the same time, you're not jeopardizing your liquidity.

Should we be concerned about the decline in CD rates, or is that just the price of doing business with CDs? It's not something to be concerned about in the context of a diversified portfolio because although we're now seeing declines in the nominal yields paid on CDs, a slowing economy typically brings about a lower rate of inflation. So the declining yields are not eroding the purchasing power of the investor.

When you talk about the decline of CD rates and how they're correlated with other rates, are there other cash instruments that are less correlated that might be holding the line, or are they all taking that downturn? I would point consumers in the direction of the highest-yielding money market and CD accounts nationwide. Bankrate.com publishes a list each week. The yields on those products typically exceed what you find on Treasury securities or in money market mutual funds. And all of that comes with the security of FDIC insurance. Just to take that one step further for the consumer, Bankrate.com recognizes those institutions each quarter that most consistently pay the most attractive yields. There's an incentive on the part of the institution to consistently offer favorable yields, and at the same time there's a real incentive for the consumer to check out these highest-yielding lists and do business with institutions that offer those attractive yields.

I would imagine that many people automatically turn to their local bank or savings and loan when they're taking out CDs or money market accounts. But you are saying that in terms of getting that extra point, it really does behoove people to shop around outside of their own bank or savings and loan down the street to get some of these better yields. Absolutely. There is a tangible premium by shopping around and doing so at a site such as Bankrate.com, where you can look on a national scale in terms of what's available and earn that extra premium for searching out the most attractive yields. That's a recommended strategy for investors who are looking to maximize their yield, and it holds true regardless of the interest rate environment.

For those who are accustomed to dealing with the bank on the corner for all of their investment or financial needs, is there anything you could say to allay their fears? Somebody who's thinking, "Why would I put my money market accounts into some bank that I've never heard of in Delaware?" Bankrate.com addresses this topic by providing assurance that every institution listing deposit products on Bankrate.com is FDIC-insured. We also provide what's referred to as a "Safe & Sound" rating system that consumers can access. We provide a rating based upon an institution's capitalization, asset quality, earnings, and liquidity. This gives the consumer the ability to make evaluations. They can compare among institutions and if for any reason they are not comfortable with a particular institution, they can look it up in the database on Bankrate.com and read about how they achieved a certain rating. This is a proprietary system that Bankrate.com publishes.

You mentioned the relationship between CDs and Fed fund rates. How much should the average person pay attention to changes in Fed rates? Is it something the average investor or homeowner should monitor closely? The one question was the impact of interest rates on the average 401(k) versus the home equity borrower. And the answer to that is it has a significant impact on the home equity borrower or anyone with a debt load. Interest rate levels have a very real effect on both individuals and businesses that carry a debtload. The current state of the economy affects your ability to service that debt -- to actually make payments on that debt. But monetary policy initiatives of the Fed are favorable for long-term investors, particularly those with a longer-term horizon, whether it's for their 401(k) or other investments in the equity market. This is because the objective of interest rate changes is to ensure that the economy continues to grow at a sustainable pace and that we're operating under conditions of stable prices -- that is, no inflation.

When are the effects of interest rate changes felt? If a cut is made, say, on January 31, how soon does that affect the home equity or credit card borrowers? Generally, there is a bit of lag time because institutions reprice on varied schedules. Some will adjust their prime rate immediately, whereas others may either adjust their prime or reprice their products on a less frequent basis, be it monthly or quarterly or whatever. Generally, it may take two or perhaps three statement cycles before that lower rate kicks in. But if you're holding a variable rate credit card or a variable-rate home equity product, you will eventually see it filter its way down to you, assuming that the lender's margin hasn't changed.

What about people who are in fixed-interest rate situations? If interest rates continue to fall, what opportunities might pop up in refinancing home equity loans? What about people who are holding credit cards with high interest rates? Falling interest rates present an opportunity for consumers to reduce their interest costs, either by consolidating or by refinancing debt. Let's start with credit card holders. If credit card holders are looking for a lower interest rate, they can search the Bankrate.com list of best credit card deals to find a lower-rate card. The line of thinking you want to take in the falling rate environment is, all things being equal, you should prefer the variable-rate card over a fixed-rate card. That's because variable-rate cards tend to be tied to the prime rate. With the recent rate cut and the prospect of future rate cuts, it is likely that the rate on the variable-rate card will decline in coming months. With the fixed-rate card, you're not necessarily going to accrue those types of benefits in a declining rate environment.

How widespread are the variable-rate cards? Is there a creditworthiness necessary on the part of the cardholder before he or she can take advantage of a variable-rate credit card? Variable-rate cards at this point are offered by the majority of issuers. In our Bankrate.com survey each week, about 70% of the institutions issue a variable-rate card. The fixed-rate card is becoming much less prevalent than in recent years.

Why might that be the case? A lot of it has to do with the fact that from the institution's and the issuer's standpoint, issuing a variable-rate card shields you a little from the fluctuations of the interest rate cycle. If your earnings are tied to fixed-rate debt, then rising interest rates would squeeze your margin. With variable-rate cards, you're able to maintain more of a steady margin, given the ebb and flow of interest rate levels.

In a rising interest rate environment, would a variable-rate cardholder try to ride that out on the variable rate or seek out a lower rate on another card? Holding a variable-rate card during a rising rate environment is not favorable because the rate is benchmarked to the prime rate. So it will increase as the prime increases. Under that scenario, you would rather have a fixed-rate card because although a fixed-rate card is not truly fixed, it is not something that issuers reprice continuously. They price it in clusters to reduce costs associated with reprinting and reissuing disclosure agreements.

The savings rate has been declining, although some say it isn't as serious as people think because investments aren't taken into account. What about the current rate of personal savings? Is this something we need to be more concerned about nationally? You're right in that the savings rate doesn't include appreciation on a home or other investment holdings, but the important thing there is it does send a dangerous signal about our reliance on debt as a society. Without that liquid emergency savings fund to draw upon in the event of unplanned expenses, the consumer is much more likely to go into debt should those type of expenses arise. And now, because those rates are so high, servicing that debt makes it much more difficult for them to save. They're spending money to service this debt, and they're in less of a position to save. Until either that debt is retired or it has been paid down enough to facilitate some level of savings, the consumer is not saving and they're equally reliant on that high-cost debt.

Can you remember a time in the recent past when the rate of personal savings was significantly higher than it is currently? In the past 24 months we've really seen it dip to its current levels, but significantly higher -- not in recent years. But again, by virtue of the fact that it's at an all-time low, it's particularly alarming in a slowing economy.

If there is a low rate of personal savings and a relatively high rate of consumer debt, and it becomes easier for consumers to add more debt through lower interest rates, won't there still be a problem with the relationship between personal savings and individual debt? A lot of that is going to come down to individual consumers employing the type of discipline it takes to remove themselves from reliance on debt. To break the debt cycle, they need to allocate more and more funds to service that debt and to aggressively pay it down. By cutting their interest costs, they can then put themselves in a position where they're able to facilitate some higher level of savings.

What are some of the problems we might see as a result of continued increase in consumer debt without the appreciation in equity to balance it out? It certainly lends itself to an increased danger of personal bankruptcy, similar to what we saw several years ago. But again, investors who are diversified are in a position where the appreciation or lack of appreciation in the stock market doesn't affect their short-term goals.

Are the minimum account requirements at online banks significantly higher than those at traditional banks? Are some consumers priced out of entry-level online banking because of these higher minimums? Over the past couple years, these accounts were open to essentially everyone. The minimums to open and earn a favorable yield were extremely low. Now we're beginning to see some institutions either charging a service fee for balances that are below a certain amount or requiring maintenance of a certain balance in order to earn that higher yield. That has been the hallmark of the larger bricks-and-mortar institutions in recent years.

What about the "trust factor"? What kind of effect does it have on the online banking industry? Consumers have a comfort level when dealing with an institution they can see and hear. They can drive down the street and visit the branches and access ATMs not only locally, but when they're in a different part of the state or country. Relating to a virtual institution, consumers, as a whole, have reservations, I think. There may be a level of discomfort in terms of either banking with an out-of-town institution that does not have a local presence, or transacting financially over the Internet.

What tools does Bankrate.com offer that can help consumers reduce debts like those incurred on credit cards? Bankrate.com publishes timely articles that deal with debt management topics and trends in interest rates and financial products. Bankrate also has a number of experts who directly answer e-mail questions that consumers submit. You can submit a question or undergo what's called a "money makeover" by submitting your information and current status, and the answer will then be posted on the site. Even if you're a little leery of actually submitting your own question, you can comb through the archives of these expert columnists and draw a correlation between someone else's situation and your own and glean some helpful advice from that.

I went through some of the areas on the site, and saw a mention of balance-transfer credit cards. Can you talk about those and how they can and can't work for people who are trying to cut down on credit debt? A lower-rate credit card is advantageous for consumers who are trying to eliminate their level of debt and cut interest costs. A balance transfer has to do with transferring that balance to a card with a lower rate. Although you can find a lower interest rate card that may free up more money in your budget each month, one of the things to keep in mind is the growing prevalence of a balance-transfer fee. When applied, it's typically assessed at, say, a 3% charge on the amount of the balance you transfer. So, for example, if you're transferring your balance to a card that has an attractive rate of 7.9%, and you're being charged a 3% balance transfer fee, your rate is really 10.9%. You need to factor that into your decision. If it makes sense, perhaps the best course of action might be to get a card that has a slightly higher rate but does not have that balance-transfer fee.

How easy is it for people to transfer a balance? I imagine that many consumers who are looking to transfer balances might have a credit situation that might make it difficult for them to jump from one card to another. The balance-transfer opportunities are readily available. Institutions use risk-based pricing where the customers considered to be least risky get the best rates and it stair-steps down from there. Higher-risk consumers get higher rates. But in the context of trying to cut down your interest costs, there is plenty of availability. A consumer who is currently overextended and delinquent on a number of accounts is not likely to have the ability to transfer a balance or refinance an account with a lower rate at a different institution. Nor are they in a position to risk losing assets that currently serve as collateral on their loans. In a situation like that, a consumer should contact his or her creditors and try to work something out to get back on track.

Unfortunately, some consumers might have more of a duck-and-cover kind of response and think they're not going to get anywhere by calling their credit card companies to try to work out a deal. Would you still encourage them to go ahead and make that call? Absolutely. It's a good first step but consumers don't realize its value. For example, if you're encountering a cash crunch situation for a short period, like in January when the bills from all your holiday spending are due, you can find relief by calling your creditors. Be upfront with them and don't make promises you can't keep. If you tell them that you'll be able to make a payment in two weeks, follow through on that promise. Credibility is important.

The worst thing someone in this situation can do is not remit a payment, not contact the creditor, and not answer letters and phone calls.

Earlier, you mentioned personal bankruptcy. As I understand it, there has been some movement in Washington, DC, to make it more difficult for people to claim personal bankruptcy in some situations. Do you think it's necessary for people to have even less access to a personal bankruptcy option? There are two sides to that argument. For many of the issuers, particularly credit card issuers, where debt is unsecured, their risk exposure to someone's bankruptcy is extremely high. But when you look at the profits in that industry and the prevalence with which credit card companies send out preapproved credit offers, from the consumers' standpoint there's the argument that if the credit card issuers have such a high exposure to bankruptcy, a lot of it is their own doing.

With the preapprovals on the one hand and the lobbying efforts to make personal bankruptcies more difficult to obtain on the other, do you get a sense that credit card companies are trying to have it both ways? That's why we're seeing a greater implementation of risk-based pricing, where credit card companies target specific offers to customers with a specific credit profile. Low-risk customers are the least likely to be either delinquent or end up in bankruptcy. They get the best offers. On the other hand, those in the high credit risk category end up paying a higher rate. It's a hedging strategy, as far as issuers are concerned.

Along the same lines, I have a question about mortgages and mortgage repayment. What I find interesting is the idea that there are instances when it's better not to pay off a debt, such as mortgage debt. Could you explain how that would be beneficial? A lot of that will revolve around not only your investment horizon, but also your rate of return versus your cost of debt. For example, if someone has a mortgage at 8% and is deducting the interest paid from their taxes, then their aftertax cost of that debt is lower, depending on their tax bracket -- say, 6% or something in that neighborhood. So investors who have a long time horizon would hope that they would be able to earn a rate of return much higher than that over time. So again, in that situation it's not necessarily advantageous to sell assets and incur a taxable event in order to pay down a debt that has a very low aftertax cost.

In a declining interest rate environment, what other advantages can homeowners utilize? With declining interest rates, there are many opportunities for borrowers. It is a great time to consider refinancing some of that higher-rate debt onto a lower-rate home equity product, for example. The advice at this point is, all things being equal, to go with the variable-rate home equity product as opposed to the fixed-rate product. As interest rates decline, the prime rate declines, and the rate on the variable-rate product would also decline, given a steady margin.

Declining interest rates should also prompt you to refinance your mortgage. Mortgage rates have dropped substantially over the past six to eight months. So if you are looking to cut interest costs, maybe you should consider refinancing some of that higher interest rate debt onto that mortgage. This gives you added tax deductibility. So not only do you reduce your interest cost, but you also free up some money in your budget each month.

I also wanted to discuss interest rates in relation to auto buying and leasing. Do lower interest rates play a role in the decision to purchase an automobile? The rates on auto loans, at present, are gradually declining for both new and used cars. They will continue to do so in the face of future interest rate cuts. There are some very attractive alternatives in manufacturer financing because of the accumulated inventory faced by many dealers and manufacturers as a result of the slowdown in sales. If you have the luxury of being able to hold off a bit before locking in a particular rate, then do so. Keep your eyes open for other attractive offers available from the manufacturer.

In a low interest rate environment, is there any difference between buying and leasing? Leasing deals will not be as attractive as they were in the past. In recent years, the industry overestimated or inflated the residual values on many leased vehicles, and that resulted in low payments. As a result, the industry is now adopting a more realistic approach to what the vehicles can be expected to retain in terms of value, resulting in some less favorable leases relative to recent years. It's not specifically tied to interest rates as much as it is to leasing itself.

While we're on the subject, from a financial perspective, do you have an opinion regarding buying a new car as opposed to leasing one? That will vary from consumer to consumer, depending on his or her situation. It pays to not put yourself in a cycle where you're constantly servicing debt on a vehicle, because they depreciate over time. Paying off a vehicle, getting yourself off the debt-service cycle, and getting much more mileage out of the car is one strategy I would recommend. You not only get the most for your money, but also put yourself in a position where your level of savings is now ramped up by the fact that you're not servicing debt payments on an automobile each month.

And after a certain point, you have an asset of some value. Some value. Over time, vehicles do depreciate, and at some point, the value of the vehicle will decline substantially. But at that point, the idea is that you've been out of the cycle of having to service the debt long enough to have been able to accrue value merely by virtue of the fact that you have a lot of years and/or miles out of the vehicle.

For someone who is considering buying a new car, is there any benefit to getting a loan from your own bank, savings and loan, or some other independent financial entity as opposed to going through the financing provided by the vehicle manufacturer? The timeless advice for consumers in this regard is to shop around. Right now, there are a lot of attractive offers in manufacturer financing deals, just because they have an inventory buildup with the economic slowdown. Shop around for the lowest-cost loan among banks, savings and loans, and credit unions. Bankrate.com provides detailed and comprehensive listings for market-specific areas. A consumer in Seattle could check what lenders in that area are offering in the way of an auto loan. By looking at a true apples-to-apples comparison, consumers can arm themselves with the information needed to make the best deal.

What are your opinions on the old-fashioned savings accounts, as well as those all-too-available ATMs and the role they can play in undermining a person's personal finance approach? With regard to savings accounts, Bankrate.com does a study twice each year on passbook and statement savings accounts. The yields paid on these accounts, at present, do not offer a great premium to the consumer. For example, the average on a statement savings account right now is about 1.7%. Again, I would refer consumers to the high-yielding money markets listed on Bankrate.com, where consumers can easily earn in excess of 51/2% or even 6% with a minimal opening deposit. They can use that as a savings vehicle and not sacrifice liquidity at the same time.

You mentioned ATMs. The topic you most often hear about regarding ATMs is the fees associated with surcharges or fees charged by your own institution for using a different bank's ATM. These fees can really add up. It behooves consumers to adopt a strategy of managing their ATM withdrawals to limit their exposure to fees. If you're banking with an institution with a broad ATM network, you would obviously want to limit your withdrawals to just your own institution's ATMs as a way of getting around those fees. This is one of the advantages of many of the Internet banks. Lacking that ATM network, a number of them offer some type of reimbursement to their customers for any ATM fees that they incur.

Wow! That's interesting. You send in your statement of the fees to that bank and they credit your account? There's generally some cap on it; for example, they'll generally reimburse up to four transactions per month, up to $6 a month, or a limit of $1.50 per transaction or something like that. But yes, on a monthly basis they would reimburse their customers for some level of fees that they have incurred.

I read an article recently on Bankrate.com on how credit unions can be a major boon to consumers. Are people often eligible to be members of credit unions but don't realize it? Membership is more open than it used to be; membership requirements associated with credit unions have relaxed in recent years. Many consumers may themselves not be a member of a particular group, but because friends or family are, membership opportunities open up for them.

Does Bankrate.com provide a tool for people to evaluate credit unions? Bankrate.com does provide rate listings that include a number of credit unions from around the country. A number of them also have direct hyperlinks from the Bankrate.com site to the credit union. We also have a specific channel that is devoted to credit unions where consumers learn the basics and read the latest news on credit unions.

I think that covers it. Thanks, Greg.

RELATED READING

Penn, David [2001]. "The 411 On 911 Funds," Working Money, Volume 2: January/February.