Make money in 2010: Your savings and credit
Credit will stay crunchy, but savers willing to shop can find good deals.
301 Moved Permanently
(Money Magazine) -- Like most Americans, you're probably pledging to save more next year -- already savers are socking away cash at a better pace than they have in years (3.7% of income recently, up from just 0.2% in early 2008).
Pat yourself on the back -- because your thriftiness won't be rewarded with much more than that anytime soon.
Interest rates on savings vehicles were dismally low in 2009, and the beginning of 2010 doesn't appear as if it will be much better. Bank savings accounts, CDs, and money markets generally track the Federal funds rate, and that has ranged between zero and 0.25% since late 2008.
"The Fed is going to be slow to raise rates for fear of choking off the recovery," says Richard Barrington, banking analyst for MoneyRates.com.
Those same low rates will benefit borrowers next year -- that is, if you can get a loan. Banks seem likely to remain as stingy about dispensing credit in 2010 as they were this year: The Fed's survey of lenders shows fewer banks tightening standards for consumer loans (33% now vs. 64% in October 2008), but none easing them.
If you do get approved, you may not be able to borrow as much: Some 17% of credit cardholders recently reported that their limits had been cut, compared with just 8% in February.
What you can look forward to is fairer treatment regarding those cards, once landmark reforms take effect that limit banks' ability to impose higher rates and onerous fees. Customers who have been on the receiving end of "gotcha" practices that will earn banks $38.5 billion in overdraft fees this year may also get some relief: Many Capitol Hill watchers believe legislation reforming overdraft policies has a good chance of passage in 2010.
Wild card: Community banks, which avoided subprime losses, could buckle under other defaults if a poor economy persists. And a meltdown of commercial real estate loans could spark another credit crunch.
Signs to watch: If the dollar weakens substantially, the cost of imports will rise -- and so will inflation. "That could spur the Fed to raise rates sooner, in bigger leaps," says Greg McBride of Bankrate.com.
Savers: Stay nimble. Savings yields may be low now, but that could change quickly. "As lending starts to pick up, banks will pay more for deposits," says Barrington. So don't lock in rates on long-term CDs and risk missing better opportunities in the near future.
The more liquid you keep your money, the better. Your best bet: FDIC-insured bank savings and money-market deposit accounts, as well as CDs that mature in six months or less. Money-market mutual funds offer as much liquidity (more, in fact, compared with CDs), but pay far less -- a bad deal.
Savers: Shop for the best rates. Don't settle for whatever your local bank is offering. You can do better if you're willing to venture further afield -- and why not, when you can make most of your transactions online these days? For example, FNBO Direct is paying 1.5% on its online savings account, five times the national average. And Nexity Bank is offering a six-month CD at 1.65%, a much better deal than the 0.6% average. Those rates may not sound like much, but current low inflation boosts your real rate of return.
Borrowers: Get out of variable debt. "Rates are only going to get higher over the next few years," warns Bankrate's McBride. "So pay down your credit cards and home-equity lines as aggressively as you can." Average card rates, for example, are expected to jump more than 1.25 points next year. Don't count on balance-transfer offers to bail you out, says Curtis Arnold of CardRatings.com. What you'd save on lower interest payments will be wiped out by transfer fees, already at 5% at several major banks.
Borrowers: Burnish your appeal to lenders. "There will be a battle in coming years over affluent consumers," says David Robertson, publisher of the Nilson Report, which tracks the card industry. Consumers with credit scores of 740 or higher who charge a lot will find deals and rewards. That's because issuers can no longer earn as much on fees and high rates under new credit card reforms, so they'll focus instead on earning merchant fees from low-risk customers.
You'll need a 740-plus score to grab the best rates on most other loans too. So pay your bills on time, use no more than 20% of your available credit, and check your credit reports regularly for errors. You can get one free report a year from each agency at annualcreditreport.com.