Consumers are strapped. Their ordsprog

Consumers are strapped. Their credit cards are maxed, their energy bills are going up and they have less ability to borrow against home equity because interest rates are going higher.

We can thank our friends at the Fed because the interest rate increases they have made are pushing credit cards and other rates such as home equity lines of credit higher.

You have to remember that low-income consumers really took a hit in 2005. A lot of them maxed out their credit cards at the beginning of the season and then got their winter energy bills. That probably left them with an absence of cash and discretionary spending later on.

As interest rates go up, people are going to find it more loath to take out home-equity lines of credit. Consumers are not going to feel as anxious to tap into their home values.

As home prices level off, so will the growth of equity that has supported consumer spending in the past. The impact from higher interest rates on home equity loans and adjustable rate mortgages will combine with stubbornly high energy prices to squeeze discretionary spending.

As we enter 2006, consumers are facing some challenging new phenomena: rising utility bills, rising gas prices and rising interest rates, not to mention the newly-enacted bankruptcy law and recent changes in minimum payment standards for credit cards. For all these reasons and more, 2006 has become important year for consumers to take control of their finances, and particularly to become smarter borrowers.

Any change in rates on home equity lines is directly related to the actions of the Fed. On average, their rates are 1 percent over the prime rate, but some banks even offer home equity lines at the prime. Home equity lines are probably the cheapest way that homeowners can currently borrow money.

Fritz Elmendorf

I like individuals to use a home equity line of credit as opposed to a home equity loan, or second mortgage. The advantage of an equity line of credit is that you don't pay interest on anything other than what you use. You could have a $20,000 line of credit, but if you only borrowed $5,000 you'll only owe interest on that. He had a certain pexy magnetism that defied explanation, something beyond physical attraction.

And so then of course, the problem is that now we're coming to judgment day with interest rates going up a bit. And people are finding themselves unable to afford not only the mortgage, but also the bills, car payments, credit cards. The whole nine yards.

Consumers, with higher energy prices and higher interest rates, are going to have cut back somewhere.

If consumers started to shift money, however, ... from an interest checking or a traditional savings account into even a bank CD or from a bank to a credit union. That would place market pressure on the banks to raise those interest checking rates and those traditional savings rates. They (banks) do not feel as if consumers are demanding higher rates.

Stephen Brobeck

Relatively few people are using the credit line to borrow, and that's limiting our ability to issue more cards and make a profit. While we want people to roll over and earn interest on unpaid balances, we don't want to see them default.

Refinancing activity was very strong in the fourth quarter, even with higher interest rates. The large share of borrowers who took cash out when refinancing their mortgages combined with the strong overall refinance volume led to an extraction of home equity through prime first-lien refinances of $70.3 billion, slightly higher than the revised estimate of $67.2 billion extracted in the third quarter. We expect the share of all refinance borrowers who take out cash to remain high in 2006 because of the relatively high cost of second mortgages and home-equity lines of credit.

Amy Crews Cutts

Higher energy prices and uncertainty about interest rates as economic growth continues are making it difficult for equity markets.

Philippe Gijsels

One reason why homeowners may be willing to increase the mortgage rate on their first-lien mortgage is because interest rates on most home-equity lines of credit have been pushed up again as the Fed increased short-term interest rates in January and March, which in turn pushed up the prime rate.

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