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How a U.S. debt default could affect you

Consumer Reports News: July 29, 2011 03:23 PM

Congress and the President have until Tuesday to resolve the debt-ceiling crisis. If that deadline comes and goes the U.S. will be in default, and the government will have trouble paying its bills and covering its costs. Failure to raise the debt ceiling would also have financial consequences for consumers. Here are a few things that might happen.

  • Loan interest rates
    If budget negotiations are not resolved by the Treasury’s August 2 deadline the U.S. goes into default. Credit agencies would then most likely downgrade the country’s credit score. A lower credit score means the nation pays a higher interest rate, which in turn trickles down to affect interest rates consumers pay. College loans, car loans, and small business loans, among other forms of lending, would be negatively affected. Higher interest rates make it that much harder for Americans to afford purchases and make payments. It should be noted, however, that Federal student loan rates would not be affected, as those fall under fixed interest rates.

  • Credit card interest rates
    A downgrade of the U.S. debt rating could cause an increase in the prime rate, which is what variable credit card interest rates are based on. The prime rate usually follows the target federal funds rate, which is determined by the Federal Reserve. Most credit cards have a variable interest rate. If the prime rate were to increase, then the interest rates on those credit cards would follow. When a credit card increases its APR because of a hike in the prime rate, that increase can take effect immediately, unlike other interest rate hikes where issuers now have to give 45-days notice.

  • Mortgage rates
    Just as a reduced U.S. credit rating would push up interest rates on credit cards, it would do the same to mortgage rates. This would make it harder for consumers with variable-rate mortgages to make their payments, and would make it harder for some to buy a new home, therefore adversely affecting the already fragile housing market.

  • Retirement accounts
    A downgrade in the government’s credit rating could cause the stock market to dive as investors scramble to adjust to the country’s new, not-so-hot credit score. This would in turn hurt retirement accounts, including both 401(k) and Roth IRAs. Stock prices have already fallen In recent weeks in response to the political wrangling in Washington. If a budget deal is not reached by Tuesday, they may well continue to tumble.

  • Job growth and security
    If the debt-ceiling crisis sends the economy crashing again, it would also be a hard hit for the unemployed as well as currently employed. If economic growth dies out, job creation stalls. The unemployed would have that much more difficulty finding work, and the currently employed would again face potential layoffs as employers dealt with the new financial landscape.

In a letter to Congress, more than 200 economists warned against the potential cost of not raising the debt limit, saying that "In a worst case, it could push the United States back into recession."

Dear Speaker Boehner, Minority Leader Pelosi, Majority Leader Reid, and Minority Leader McConnell(pdf)
Five Things to Remember in the Debt Ceiling Debate [Huffington Post]
How the debt-ceiling crisis could affect ordinary Americans [Los Angeles Times]
How The Debt Ceiling Talks Affect All Americans [Forbes]
How the Debt Ceiling Crisis Will Affect Consumers [Businees Insider]

Maggie Shader

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