If the U.S. Credit Rating Goes Down, Your Credit Card's Interest Rate Goes Up

Sunday night, we all got the word that a tentative deal to reduce the U.S. deficit and avoid default had been reached. Having now passed House and Senate muster, we wait with bated breath for President Obama to sign the bill into law. Before the deal was reached, each side blamed the other for the debt ceiling spectacle. And it was an outrageous spectacle.

After this deal was on the table, the Internet was abuzz with quotes coming out of Washington. Comments ranged from “we stuck to our principles” to—my favorite—the deal was “a sugar-coated Satan sandwich.”

My reaction to their reaction? Get over yourselves.

In spite of the deal, there’s still a strong possibility that the U.S.’s credit rating will go down. Here’s what I want to know: Do these folks in Washington have any clue how the possibility of a downgrade to our credit rating affects real people? I’m talking about the hard-working people in America who voted for them and put them in office. Yes, all of us.

At one point, I was watching a scene that showed Pelosi and Boehner and others sitting at a long table in the Roosevelt Room at the White House. I couldn’t help but notice the fine china on the table. Apparently, they’re sipping coffee from expensive teacups while thinking about how to get what they want from the guys and gals across the table.

To me, the scene in this lovely room made them look incredibly out of touch. I wonder if anyone in that room mentioned that the credit rating agencies had indicated to various news outlets that if the deficit reduction plan targeted less than $4 trillion, the U.S. could still get a downgraded credit rating. The current deal sits at $2.4 trillion over a decade, which is far short of $4 trillion.

Did anyone in that room stop to think about what it might mean for real people? If the U.S.’s credit rating gets downgraded, interest rates won’t be pretty. Have you ever played dominoes? Think of the U.S. Treasury bonds rate as the first piece to fall. When the rating is downgraded, the U.S. becomes a bigger risk for investors and that makes the bonds’ interest rate go up.

The U.S. government now has to pay more to borrow money. Just like you and I do if our credit score slips. Next, the government needs to charge banks more to borrow money. When this happens, the prime rate goes up. When the prime rate goes up, the interest rates of credit cards that are tied to the prime rate—and most of them are—will increase. And that’s how the consumer gets shafted in all of this.

I’ve seen predictions that rates could go up between 1 percent and 5 percent. This is extra scary because our economy is already rocky. A family who carries credit card debt in order to make ends meet is the real loser here. And if rates go up, this family might have a hard time even making the monthly payments on their credit card.

What makes all this worse is that there still isn’t a long-term strategy in place to reduce the deficit and restore order to the economy, thereby taming interest rates. A joint, bipartisan committee will be tasked with developing legislation that will offer a plan by this Thanksgiving to reduce the deficit by another $1.5 trillion in the future. If the committee fails, there are built-in triggers to cause much bipartisan pain.

Do any of you have any confidence that these people can work together? All I can say is that our elected officials in Washington need to grow up and do what’s best for the consumer. You know, the real people who pay their salaries.

[Resource: Get your free Credit Report Card]

Image: Daniel Lobo, via Flickr.com