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If the U.S. debt ceiling isn't raised, the floor on your credit could give out. Not to mention the walls, the front porch and the back yard.
Anyone who hasn't been paying much attention to the debt ceiling fight in Congress may have little choice after August 2. That's the day the debt ceiling has to be raised, or the United States will be at risk for defaulting on its debts.
Granted, it seems ludicrous that Congress and the White House won't work out a deal, but it's still prudent for any credit card holder to consider what the ramifications will be if the sky does actually fall--because it's pretty clear that credit card users will be affected. Of course, it's pretty clear that just about everyone who breathes air on the planet will be affected…
But since this beat happens to be credit cards, let's take a look at what is likely to happen if that pesky debt ceiling isn't raised:
Interest rates will rise
Analysts across the country have been saying that if the debt ceiling isn't raised, people will almost certainly pay more money for loans, including credit cards. Why? Because if the country doesn't have enough cash to pay its own creditors, global financial ratings services will then downgrade America's financial ratings. One official at Standard & Poor, an American financial services company that publishes financial research and analysis on stocks and bonds, has predicted the agency would downgrade the United States from AAA, the top rating to D, a junk rating.
That would make it costlier for the federal government to borrow money, resulting in an extra $10 billion a year in interest rate payments, some news reports say, and interest rates on everything from credit cards to auto payments would climb.
"It's going to be more than a full percent," says Mac Clouse, professor of finance at the University of Denver. "It would not surprise me if it went up 5 percent because this would be a serious violation of a premise that's been in the financial markets for a long, long time. I think the mass marketplace across the world would read this as a real concern. If the U.S. is having trouble meeting its debt obligations, what does that mean for us?"
Fortunately for some people, credit card interest rates won't shoot up immediately. Because of the Credit CARD Act of 2009, credit card companies must send consumers a notice 45 days before they can increase the interest rate. (That said, some industry experts have pointed out that a loophole allows credit card companies to start raising the interest rate, even on fixed interest rate cards, on the 15th day after deciding to raise them. It's simply that a consumer has 45 days to refuse the hike and instead elect to pay off their balance at the old rate.)
Unfortunately, with a credit card that has a variable interest rate--and more and more do these days--the interest rate would probably change "instantaneously," says Clouse. "As soon as there's one default of some sort, the credibility that the United States government has will have been violated."
It will be harder to get credit
If interest rates climb high enough, lenders will determine that some people won't be able to successfully keep up with the payments on their credit cards, and more people will be turned down.
Gerry Fleming, a professor of economics at Roanoke College, predicts that "It will be more difficult to secure a card or get an additional credit line, value of portfolios will decline, unemployment will rise, commodity prices will rise, for example oil, and we (will) see an end to an already very weak recovery."
Fees will climb
Perhaps not immediately, but with the cost of credit being higher, and fewer newer customers able to get credit cards, and credit card companies needing to bring in income somehow, that seems to be a logical conclusion.
Rewards will drop
Although the best rewards credit cards won't be likely to drop as much, at least not at first, with; those who have good credit and pay off their balances every month will be even more coveted by credit card companies.
But rewards credit cards have been on something of a comeback lately, especially when it comes to those offering airline miles, and it seems impossible to imagine--if the debt ceiling isn't raised by August 2 or soon after--that rewards will be accessible to most credit card users.
Prepaid cards will boom
Purely speculative, but the prepaid credit card industry is thriving. According to a recent Associated Press article, consumers put $41 billion on prepaid credit cards in 2008; that number is expected to be up to $288 billion in 2014. If more people can't get credit cards, the prepaid alternative stands to benefit.
Not that it's all doom and gloom. Fleming says that if the debt ceiling isn't raised, while things could get very bad in the short term, "in the longer run, getting our fiscal house in order may prove positive on a host of things."
And Clouse is in the camp of those who believe that one way or another, the debt ceiling will be raised, and probably speaks for a lot of people when he says: "For all of the posturing that's going on right now from a political standpoint, one way or another, they're going to have to come up with some sort of agreement. There may be a lot of strings attached, but the United States just can't put itself in that position of defaulting on loans."
Too big to fail?
Whatever the outcome of the debt ceiling debate (and predictions of that outcome and its ramifications vary widely) it remains to be seen if "too big to fail" applies to that biggest of all U.S. institutions--the federal government.