Euro Banks Tighten Lending, and Your Mortgage Payment Might Rise

Last Updated May 27, 2010 11:46 AM EDT

Banks around the world are raising the interest rates they charge each other on short term loans, and that can be bad news for anyone paying off a mortgage, a credit card or a student loan. Today the 3-month London Interbank Offered Rate (LIBOR), a widely-used benchmark, rose for the 13th day in a row to 0.538 percent -- its highest rate since July 6, 2009, and double where it stood in February.

That could be a sign of all sorts of bad things, suggest the analysts. While most likely spurred by European debt worries, the increases reveal on a basic level that bankers have less faith in other bankers to pay back their loans. It also could portend rising rates for consumers.

That's because many variable rate credit products are pegged to the Libor -- some $360 trillion in debt, worldwide. In the U.S., many adjustable rate mortgages, home equity lines, private student loans, and even some credit cards rise and fall with the Libor, which tends to be more volatile than the prime rate.

So as the Libor rises, so might your monthly payment. Here's how to minimize the impact:

Replace the mortgage. With mortgage rates grazing all-time lows, you may not want to keep that variable rate loan. Instead, you can refinance to a fixed rate loan. But if you expect to sell the home in five years or less, you might just want to stick with your variable rate loan and pay the extra interest.

Pay off the card. Only a handful of credit cards currently peg their rate to the LIBOR, says Bill Hardekopf of But that's almost besides the point. You shouldn't be paying any credit card interest. If you're still carrying balances, do a balance transfer to the lowest rate card you can qualify for (being mindful of balance transfer fees that can jack up your effective rate). Then throw everything you've got -- spare change, proceeds of a yard sale, money saved by canceling cable -- toward bringing the balance to zero, as quickly as possible.

Suck up the student loans. There's not too much you can do about private student loans. The consolidation deals usually aren't any better than the original loans. Just keep plugging away.

Continue to pay down all debt. The LIBOR rate hikes might not just be a sign of weakness in Europe, they might well be the first sign of a prolonged era of interest rate increases as a recovery takes hold in the U.S. Either way, the less debt you're carrying, the better, so stick with the plan.

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