The full impact of ratings agency Standard & Poor’s downgrade of U.S. debt remains unclear. But one outcome credit analysts say is almost certain is higher consumer interest rates.
Treasury rates were fairly stable in morning trading after the S&P announcement, but even minor ripples through the yield curve will impact consumer borrowing. Credit card holders who regularly revolve a balance will be among the first to feel the pinch, says John Ulzheimer, president of consumer education for SmartCredit.com. He predicts cardholders will see increases within the next three to six months, and sooner if one of the other ratings agencies follows S&P’s lead by also downgrading U.S. debt.
(MORE: Investment Outlook: S&P Downgrade Doesn’t Change a Thing)
Of course, the worst-case scenario was averted last week. Had the U.S. defaulted over the debt ceiling issue, economists were predicting an up to 5 percentage point increase in the prime rate. As it is, Ulzheimer says rates could go up 2 to 3 percent. In other words, if you have a card with a 12 percent APR today, prepare yourself to pay 15 percent by the holidays.
Thanks to the Credit CARD Act of 2009, card issuers can’t hike an APR on existing balances unless you don’t pay on time. They also can’t increase the APR on new balances without giving you a 45-day notice and the chance to close the account — if you have a fixed-rate card.
But the law exempted variable-rate cards — those on which the interest is tied to the prime rate — from that provision. And most credit card companies, says Ulzheimer, switched customers over to variable-rate cards en masse.
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Bottom line: If you can, it’s probably a good idea to dial back your credit-card usage for a while so you’re not surprised by a suddenly higher rate when you open your monthly statement.