That’s the big question on everyone’s mind: How will the S&P lowering of U.S. credit affect my credit cards, my payments and my money? By itself, you won’t likely notice any big changes; however, with so many dynamics at play, there could be some shifts in your budgets that have the potential of wreaking havoc. Here are three ways these uncertain times could affect you, your credit cards and your overall financial outlook.
Credit Card Interest Rates
One of the most unpredictable aspects of owning a credit card is the variable APRs. The dynamics are sometimes confusing, especially when there are so many factors at play that the consumer has no control over. That said, you might begin to notice a higher interest rate on your new purchases.
If that happens, it won’t apply to your previous purchases (and if does, you should contact your credit card company or bank). Keep in mind, too, that any interest rate hikes cannot occur until and unless your credit card company provides at least a 45 day notice. It’s part of the new credit card laws that began going into effect in 2009.
Keep in mind, the interest rates the United States pays (yes, it pays interest) is based solely on treasury bills. If it becomes more costly for the U.S. to repay those loans, or if the yields increase, those costs could be passed down to the taxpayer in the form of higher interest rates for new loans, credit cards and mortgages. If you don’t take out any new credit cards or apply for a new mortgage, you won’t be shouldering any of those costs, at least in terms of interest rates you pay.
Your current bank loans, mortgage and other fixed rate loans won’t change because of the S&P downgrade. If you purchase a new home or a new car in the coming months, you might not be happy with the interest rate you’re offered. That’s not set in stone as of yet; however, depending on what happens in coming weeks (especially if another credit agency, such as Moody’s, downgrades the U.S. the way S&P did), we could see higher interest rates.
New and Current Mortgages
Here’s where it might become a bit convoluted. Many Americans have attached to their mortgages a line of credit, or HELOC (home equity line of credit). While the interest rate is fixed when it comes to their traditional 15 or 30 year mortgages, it’s those HELOCS that are considered variable, meaning they vary depending on the market trends. Often, homeowners only pay interest on these loans and of course, that interest varies.
Depending on how black the days become in terms of Wall Street and Uncle Sam, you could find yourself paying far more on your second mortgage. In fact, some economists say there will likely be a flood of defaults on these loans, even as consumers continue to make their traditional mortgage payments. It could easily become overwhelming with first, the increased interest rates, and second, the variable nature of the HELOC. It can become difficult to meet those financial obligations if they fluctuate hundreds of dollars each month.
Let’s face it, there are simply too many dynamics at play for anyone to accurately predict what comes next. Still, your biggest ally is, of course, yourself. If you’re concerned or are already struggling, your first best bet will always be to contact your creditors. Tough times don’t have to necessarily equate to a ruined credit report. The fact is, this credit downgrade is a new one for everyone. It has never happened in the history of the United States. With the fickle nature of financial markets, along with the unpredictable nature of the politicians who are at the helm, we simply don’t now what happens next in terms of the big picture.
If you can afford to hold off with the purchase of that new car, that probably is a wise idea. If you’ve put off a vacation for three years and don’t want to wait another year, choose your credit cards wisely. Double check to see if you have any travel rewards that can be redeemed – you could save money on your flights, or for that matter, you may have enough accumulated that you fly free.
Also, see what kinds of promotions your credit card companies have going on. For instance, Visa’s Travel Promotions page offers many travel related discounts throughout the year. Discover’s ShopDiscover promo offers cash back bonuses at more than 175 companies, including cruise lines and car rental agencies. Keep in mind, however, these new charges could affect your interest rate moving forward.