The folks in Washington are doing a lot of grandstanding about raising the debt ceiling. I’m all for fiscal responsibility, but what the politicians aren’t grasping is what happens to all of us “regular people” if the ceiling isn’t raised.
If the U.S. defaults, it’s predicted that our AAA credit rating goes down. Should that happen, the U.S. would then have to pay more to borrow money. This makes sense, right? If you, the consumer, don’t pay your bills, then your credit score goes down and you pay a higher interest rate to borrow money.
So if the U.S. has to pay more to borrow, the prime rate that banks pay to borrow money to lend out to consumers goes up. And guess what happens when this increase makes it all the way down the food chain to the consumer? The vast majority of credit cards have variable rates and they go up and down with the prime rate. So if the prime rate goes up, your variable rate goes up by the same amount.
[Related article: Though a Deal on the Debt Ceiling is Close, the Stakes Are High]
If you’re hoping that the Credit CARD Act of 2009 will protect you, don’t count on it. Even if you’ve had your card less than a year, when your rate is tied to an index, such as the prime rate, your bank doesn’t even have to send you a 45-day advance notice.
But what if you’ve had your card for more than a year? Your interest rate is fair game. I’ve been following the credit card industry for a long time and one thing is clear: The industry gets spooked easily whenever anything threatens revenue. It’s possible that banks will raise interest rates even higher than the increase associated with the prime rate.
Oh, you’ll get the highly-touted 45 days’ notice, but your new, higher rate will be applied to purchases on the 15th day after the notice is mailed to you. You get 45 days before you have to begin paying the new rate.
Okay, I hate to sound like I’m full of doom and gloom. I just want you to be prepared for whatever happens. The debt ceiling will most likely be raised, but if it isn’t, open every piece of mail that your credit card issuer sends you. You really can’t afford not to.
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Image: Claire Schmitt, via Flickr.com
Beverly Blair Harzog A consumer advocate, Beverly focuses on credit card issues and provides insight about current news that affects the credit card industry and consumers. She's a nationally recognized expert on credit card issues and is also the co-author of The Complete Idiot's Guide to Person-to-Person Lending. Visit Beverly at BeverlyHarzog.com.
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I think you need to point out one fact just a bit more – by law, the new higher interest rate ONLY applies to purchases made after that date and NOT to the outstanding balance.
http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm
(4th major bullet point from top of page)
The interest rate hikes won’t affect us. We quit using credit cards 10 years ago and pay by debit, check or cash. Nice lifestyle and no debt.
Sounds like you’ve chosen the right lifestyle for your needs, Eleanor. Kudos to you!
Hi Ernesto, that’s an excellent point. And in most cases, you are correct. Unfortunately, there’s a loophole in the CARD Act that allows retroactive increases under certain circumstances.
The Fed doesn’t point this out on its consumer info page, but one of the exceptions to the rule is if you’re more than 60 days late with a payment. In this case, if you receive a notice that your rate is increasing, the bank can apply the new rate to your outstanding balance beginning on the 15th day after the notice is mailed.