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Uncle Sam’s credit standing is now lower than it has ever been before. Alright, that may be a bit dramatic. It is still near the top of the ratings, but has taken an unfortunate slide down a peg. This means that the United States Government will have to pay higher interest to borrow money, as it is now viewed as a riskier customer. As many debt instruments, including credit cards, are linked to Treasury bills, it is reasonable to assume that rates on such debt will rise. What does all of this mean for your credit card debt?
Under the CARD Act, purchases that you have already made are shielded from rate increases. This is great news if you have a pile of debt that you are concerned will become costlier. As long as you pay off such debt within the payment terms, you should be free from any effects of the US’ credit downgrade.
If you have a variable interest rate on your credit card, it is best to discuss your rate with your credit card provider. It may increase quickly as a result of the US’ credit downgrade. Keep a close eye on it and limit or avoid using it if your rate climbs to an unsatisfactory level.
Those with fixed rate credit cards are required to be given a minimum of 45 days notice of a rate change in most cases. You then have the option to close your account to avoid the fee increase. Legally, your credit card provider cannot punish you for doing so. If you choose to do so, it is important to close the account within the 45 days to retain your legal protections.
As mentioned, the current laws dictate that the US’ credit downgrade will only apply to future purchases. That $10,000 you may have in credit card debt should be unaffected by the downgrade. However, this is ultimately a decision that related to your personal financial situation. As it is rarely a good idea to let debt linger when you have the means to pay it off, it may be a good idea to pay it off now if you have the means to do so. As always, consult a financial professional before making any serious financial decisions, including this one.
As future purchases will be affected if the US’ credit downgrade results in higher credit card interest rates, choose wisely when making credit card purchases. Such purchases will be subject to higher interest rates if rates do rise. Also, review your credit card agreement to make sure that you know which type of credit card you own. Thinking that a variable rate credit card is a fixed rate card could have significant consequences if you spend a large amount. In essence, the US’ credit downgrade is irrelevant to any credit card debt that you already have and should not be factored in when deciding whether or not to pay it off. As far as future purchases are concerned, make sure you understand the terms of each credit card you own and spend wisely to minimize the effects of the credit downgrade.