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Debt Ceiling and Credit Cards: Why You Shouldn't Care


Congress has pushed through a last-minute bill that will arrive on President Obama's desk this afternoon. In addition, the White House has already stated that even though this bill is imperfect, the President will immediately sign it to ensure the debt ceiling is raised and our government is able to continue paying its bills.

Hurray, the debt ceiling crisis has been averted. Way to go guys and gals! You beat the deadline by a few hours…it's a miracle.

In all seriousness though, a lot of experts are still concerned about whether this deal will be enough to avoid a first-ever credit downgrade for the United States. The President has even gone so far as to say that if our triple-A credit rating were downgraded, "interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people."

But is that really true? Would interest rates skyrocket on your credit cards if this were to happen? Well, I wouldn't say skyrocket, but there is an indirect relationship here that we should all understand.

If the United States' credit rating were downgraded, it's safe to say that treasury rates would rise and the government's cost of borrowing would become more expensive. Think of it like this. If you were to exceed your credit limit on your credit card or miss payments, this would impact your FICO score and lenders would view you as more risky. They would then want to charge higher interest rates to compensate for the additional risk of lending you money.

Unfortunately, this whole debt ceiling situation has made the U.S. look like a riskier bet even though we've apparently avoided the dreaded default itself. A credit downgrade by S&P or Moody's would trigger higher interest rates on long-term treasuries, which in general would lead to a higher level of market interest rates since many consumer credit products are linked to the amount the Treasury pays to borrow money. If the government's rate goes up, yours eventually will too. It's as simple as that.

Enough of the macroeconomics mumbo jumbo though. Here's why you shouldn't be worrying at all about the effects of the debt ceiling on your credit cards:

Savvy Cardholders Don't Carry Balances

There are 2 types of credit card users—those that never carry monthly balances and those that do. If you're reading this and you currently carry a balance, that needs to change right now. Going forward, you need to take a closer look at your finances and make sure you're only using credit cards to purchase what you already have the cash to pay for. It's really the only responsible way to use credit cards.

Savvy card users shouldn't care about interest rates because they live within their means and only buy what they can afford to pay off each and every month. In fact, I can't remember the last time I actually looked at what the interest rate was on one of my credit cards. I don't care, because I never pay finance charges and neither should you.

CARD Act Protects Existing Balances

No one is perfect, so I realize that many Americans do carry balances on their credit cards. If you have existing credit card balances you're slowly paying down, it's important to remember that the CARD Act of 2009 protects you from retroactive interest rates as long as you stay current on your payments. What that means is any interest rate increase that did occur due to the debt ceiling fiasco would not affect payments on your existing debt. And since you just read this article, I hope you've already made a commitment to yourself to never carry a balance in the future again.

Both politicians and the media love to create a lot of hype in circumstances like these.  It's the nature of the beast.  I'm not saying the debt ceiling issue isn't serious business.  It most certainly is, but my point is that credit card interest rates should be the least of your worries.  What you should really be worried about are the tax hikes and painful budget cuts that are most certainly coming our way soon.  They're going to hurt a lot more.

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Joshua Heckathorn's picture

Joshua Heckathorn was President of Creditnet, is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past ten years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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