How A Default May Affect You

Aside from the obvious: FHA and VA may have to shut down mortgage lending to almost half the borrowers in the United States–here are some very real concerns, as outlined by CNN/Money

With less than a week to go before the nation’s borrowing limit must be lifted, the debate over the debt ceiling rages on, with your money hanging in the balance.

Even though the possibility of a default seems unlikely, credit agencies have warned that they will downgrade the nation’s credit rating if Washington cannot hammer out a debt deal soon.

If the U.S. loses its top AAA rating, the nation will no longer benefit from having the lowest lending risk and therefore, the lowest interest rates. That’s where you come in.

The government’s borrowing rate is the base line from which other borrowing rates are determined, explained Greg McBride, senior financial analyst for “Driving up Uncle Sam’s borrowing costs is also going to drive up the borrowing costs for everyone else,” he said.

Without that prime rating, all lenders will demand a higher rate of return on their investments — and that means higher rates on credit cards, student loans, mortgages and car loans.

Credit Cards

Credit cards are the easiest form of credit, and about three-quarters of Americans have one, according to Bill Hardekopf, CEO of and author of “The Credit Card Guidebook.”

Most credit cards, though, are tied to the prime rate, which is not likely to change. What could happen, however, is that issuers will raise the margin they charge above the prime rate even further. So, for example, instead of an APR roughly equal to the prime rate plus 10%, an issuer may charge the prime rate plus 11%, McBride said. “If Uncle Sam is a riskier borrower then so are a lot of other borrowers, and card issuers are very quick to mitigate their exposure to additional risk,” he noted.

The average credit card annual percentage rate, or APR, is currently 14.08%, but could potentially jump at the issuer’s discretion. In that case, issuers have to give you 45 days notice.

When you’ll notice: Within two billing cycles.

Mortgage rates

Fixed mortgage rates are priced in direct relation to the yields on 10-year Treasury securities. So, in the case of a downgrade, fixed mortgage rates would rise roughly in lockstep with any bump up in the 10-year Treasury yield, according to Keith Gumbinger of mortgage rate tracking firm HSH Associates. For example, if the 10-year yield rises by a quarter of a percentage point, that means a 30-year fixed rate mortgage could jump to 4.87% from its current average of 4.62%.

Although that rate is still relatively low, no one would welcome a higher mortgage rate, Gumbinger said. Very low interest rates are currently providing support for the real estate market, and any increase in costs might cause some borrowers to rethink purchasing a home, he explained. In addition, fewer consumers would qualify and fewer mortgages would be issued, further depressing an already weak housing market.



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