(MONEY Magazine) – Funny thing about interest rates: Whichever way they move, somebody's unhappy. Since 1990, when they began flying steadily south, the losers have been conservative investors with a need for income. For them, CDs paying as little as 2% to 3% were appalling. But now that rates are rising again, savers are happier. Today's sufferers: would-be homeowners and anyone in debt (which covers just about everyone). But whether you're a debt-free saver or a heavy % borrower or somewhere in between, the round of rate increases that began in February means it's time to rethink your strategy. Start with the notion that the best offense may well be a good defense. Since the Federal Reserve Board began raising short-term rates, the average 30-year mortgage rate has climbed about 1.5 percentage points, while the prime rate has jumped three-quarters of a point. By contrast, the yield on one-year CDs was up just under a quarter of a percentage point as of late April. Clearly, in such a climate, restructuring debt to reduce interest cost should be a higher priority than chasing a little more yield. Consider a hypothetical homeowner about to take out a $100,000 mortgage, with $20,000 in other debts and an equal amount of savings -- $120,000 split between money-market accounts and CDs. As a result of those recent rate increases, this individual is paying $1,229 more a year in interest -- but earning just $114 extra. Many economists believe that much of the pain from rising long-term rates has already been inflicted -- for a while anyway. The consensus view is that long-term-bond rates will range between 7% and 7.5% at year's end, roughly where they are now. Short-term rates, however, will have climbed another half a percentage point or so. What should you do now to make the most of higher rates? Here's our advice in five areas.

SAVINGS Park emergency reserves in a money-market mutual fund. With yields averaging 3.1%, money funds handily beat the puny 2% rates still being offered by most bank savings or money-market accounts (see the table at right). And unlike CDs, their yields are not fixed, so you'll immediately earn more if short-term rates continue to increase. (You can minimize this risk, if you insist on holding CDs, by sticking to maturities of six months or less.) Many money funds also provide free checking with your account or charge a modest fee of $2 or less per transaction. But the amount you must invest initially, the balance you must maintain and the minimum you can withdraw per check vary widely. Your best bet right now: United Services U.S. Government Securities (minimum balance: $1,000; minimum check withdrawal: $500). Because it owns only Treasury bills or government agency obligations, this fund, which yields 3.72%, is exempt from state and local income taxes. If you're paying federal income taxes at a marginal rate of 36% or more, you can get an even bigger after-tax return from a federally tax-free money fund. - Strong Municipal Money Market delivers a taxable equivalent yield of 3.8% to someone in the 36% bracket, and requires a balance of $2,500 and a minimum check withdrawal of $500.

If you have more than $10,000 earmarked for a short-term goal, buy Treasury bills or open a Treasury-indexed money-market account. Three- and six-month T- bills are yielding 3.81% and 4.32% respectively. That's 10% more than three-month CDs and nearly 45% more than six-month certificates. Unlike CDs, T-bills are also free from state and local taxes. The main drawback: Treasury bills are sold only in $5,000 increments, with a minimum $10,000 face value. You can buy them from a bank or brokerage firm, but you can save the roughly $50 commission by buying directly from the Bureau of the Public Debt in Washington, D.C. (202-874-4000, ext. 251) or from one of the 37 offices of the Federal Reserve Bank. You can beat T-bill rates, plus enjoy easy access to your savings, with one of the Treasury-indexed money-market accounts offered by banks. Two available nationally are those at Madison Bank (Ill.) and First State Bank Calumet City (Ill.), shown in the table on the right. These pay yields guaranteed to be equal to or higher than the three-month T-bill rate, depending on your balance. More than $100,000 gets you the T-bill rate plus half a percentage point. Maintain a balance of at least $10,000 and you can also write three checks a month for free. Now here's the stick: Go below $10,000 and you'll get slapped with a stiff $25 monthly fee.

INVESTMENTS If you've read this issue's cover story, "Buy Stocks Now!" on page 72, you're well aware that stocks and stock mutual funds should be your top investment choice today and for the rest of the decade. Nothing else will keep you ahead of inflation and taxes over the long haul. -- Consider utility stocks, if you're a conservative investor. Utilities' traditional appeal is that they offer safe, high yields plus a chance to collect capital gains. That hasn't been true lately, however. These stocks typically behave like bonds, falling in price when interest rates rise. But they have recently declined considerably more than the climb in rates seemed to warrant. From mid-September to mid-April, prices of utilities fell, on average, by more than 20%. Result: Many now look like bargains. Among the hardest-hit utility stocks were electric companies, which have been panned in recent months by some experts, among them Peter Lynch, former manager of the famed Fidelity Magellan Fund. The worry is that continued deregulation of the industry will pull down earnings over the next decade. But Roger Conrad, editor of Utility Forecaster, argues persuasively that, as competition heats up, some low-cost, efficiently run electrics will grab market share -- and thus can continue to offer income investors a high degree of safety and good dividend growth prospects. Conrad's favorites include Dominion Resources (ticker symbol: D; recently traded at $42 on the New York Stock Exchange; yield: 6%), Entergy (ETR; NYSE, $31.25; 5.8%), Duke Power (DUK; NYSE, $36.25; 5.1%) and UtiliCorp United (UCU; NYSE, $30; 5.4%). Donald Cassidy, author of Plugging Into Utilities (Probus Publishing, $24.95), also likes a few gas companies, which have already undergone extensive deregulation. Brooklyn Union Gas (BU; NYSE, $23.75; 5.7%), for example, has raised its dividend for 18 years straight and is likely to continue doing so at a rate of 3% to 4% a year, Cassidy says. Each of these companies offers a dividend-reinvestment plan. So after you buy your first shares, you can continue to invest without having to pay a broker's commission. In general, however, you should limit utility holdings to no more than 20% of your total investment portfolio. An appealing alternative for income investors is five- to seven-year Treasury notes -- provided you hold them to maturity. They currently yield 6.48% to 6.8% (for more, see Buy, Sell or Hold, page 27). For other fixed- income ideas, see the story on page 50.

CREDIT CARDS If you carry a balance on your credit card, get ready to pay slightly more this year. Some 70% of credit cards tie the interest they charge to banks' prime rate. Already, the average cardholder, who carries a balance of about $1,700, has seen his or her annualized interest charges increase by $14 or so. -- Dump any card that charges more than 17% and doesn't come with perks. Often, just the threat of doing so will spur your issuer to give you a better rate, usually with no fee. Nowadays, it's easy to find variable-rate cards at around 12% (prime plus 5.25%). That's still well below the 18.5% typical on fixed-rate cards. Another option: Take advantage of one of the various short-term teaser rate offers. Wachovia Bank is plying a card fixed at the current 6.75% prime rate for 12 months ($18 annual fee; 800-842-3262). When the introductory offer expires, Wachovia charges a low prime plus 3.9 percentage points. -- Don't carry a balance on bonus cards. By offering points toward discounts on purchases, this new form of plastic, sponsored by GM, GE, Shell and others, is becoming increasingly popular. The catch is that most such cards charge rates that are now above that nosebleed 17%. The solution: Get a second piece of plastic with a lower rate. Then you can continue to use the bonus card for everyday charges, but transfer any balances to the less costly card before the end of the month by writing a check drawn on that account. (Wachovia, for example, provides cardholders with an unlimited number of free checks.) "That way you get the best of both worlds," says Robert McKinley, president of RAM Research, which tracks credit cards. "Rebates and a low rate."

YOUR MORTGAGE Now for some good news. Since spring '93, the yield on one-year Treasuries, the index for many one-year adjustable-rate mortgages, has moved up 1.6 percentage points. But the average starting rate for a one-year ARM has climbed by only half that amount, from 4.63% to 5.16%. Indeed, because competition among lenders is fierce, you may be able to find ARMs with starting rates as low as 4%. -- If you think you will move in four years or less, opt for a one-year ARM. Here's why: One-year ARMs generally come with caps that limit the amount a rate can increase to two percentage points a year or six percentage points over the life of the loan. Assuming the worst-case scenario, your interest rate would be 5% the first year, 7% the second year, 9% the third year and 11% the fourth. This translates into an average rate over the period of 8%, under the late-April rate of 8.61% for a 30-year fixed-rate mortgage. -- Staying put slightly longer? Check out so-called two-step or balloon-reset mortgages. Two-step mortgages with five- or seven-year terms offer longer shelter against rising rates than ARMs -- at a better price than 30-year fixed-rate mortgages. They often start out at rates that are roughly three- quarters of a percentage point below those on the 30-years (recent average rate for a seven-year two-step: 7.77%). The mortgage stays at that level for the first five or seven years and is then tied to an index, typically the value of the 10-year U.S. Treasury bond plus 2.5 percentage points (currently about 9.5%). -- Otherwise go for a fixed-rate mortgage. If you don't know how long you'll stay or you're sure this house is for keeps, a 30-year fixed-rate loan -- or a 15-year if you can pay higher monthly payments -- is still your best bet. Yes, current rates are painfully high compared with last fall's 6.83% on 30-year loans but are well below the 10% to 11% of five years ago. -- Lock in your financing before you house shop. California-based Countrywide Funding Corp. (800-877-5626), the nation's largest mortgage lender, offers a "Lock-and-Shop" program for no additional points or fees. Countrywide lets borrowers shop for 30 days, guaranteeing they will pay no more than the locked-in rate; once the borrower finds a house, the lock-in is extended to the closing, or for a maximum of another 45 days. American Residential Mortgage Corp. (800-443-4829), a nationwide lender based in La Jolla, Calif., offers a 75-day "RateStopper" program, also at no charge. Both it and Countrywide allow you to reset your cap should interest rates fall prior to closing.

OTHER LOANS -- If you haven't taken out a home-equity loan to pay off other debts, get one immediately. For most of us, these will remain our cheapest form of nonmortgage credit. Thanks to unrelenting competition, the cost of the average home-equity line of credit -- lately 7.82% -- is still about where it was a year ago. "Although lenders have raised their prime rates, many are lowering profit margins on home-equity lines in order to attract new borrowers," says Keith Gumbinger of HSH Associates, a Butler, N.J. firm that tracks interest rates. And this brand of interest is still tax deductible. More good news: Auto-loan rates, though they will inch up slightly, should stay below 9% -- a bargain compared with the 12.5% that banks and credit unions charged five years ago. Why? To draw business away from banks, car dealerships are continuing to offer buyers rock-bottom financing, sometimes at interest rates as low as 3%. Now that's a 3% rate that everyone can appreciate.