What the changing economic conditions mean for your finances.
As just about anyone who has turned on the news, opened a newspaper or turned on the internet knows, earlier this month, Standards & Poors downgraded the United States' credit rating from AAA to AA+. The credit rating took a dive because of the debate about raising the nations debt ceiling, the fact that we are going to take on more debt to pay our obligations and simply because there is no clear plan on how we plan to pay back any of our debt.
There is no denying it, the economy is in a bad place, and it might even get worst. For the 14 million people who are out of work and looking for jobs, this news certainly doesn't help bolster their flagging spirits.
So, what does this mean for you and me?
When the nation's credit rating goes down, it's very similar to when our personal credit scores drop. When you have a lot of debt, you have an elevated credit risk. Of course, how much the risk is elevated depends on the type of debt. Unsecured debt is the riskiest, while secured debt isn't as high of a risk. The difference between the two is that with secured debt, there is some type of collateral that is valuable to the debtor (that they will lose if they don't pay) and with unsecured debt, the creditor has nothing to repossess.The higher the risk, the higher the interest rate you'll be offered.
It still remains to be seen what the long term impact of this downgrade will be, but many experts think that interest rates will go up substaintially, as much as 5 percent. For you and I, the biggest concern is going to be how the rising interest rates will effect variable rate credit cards and home equity loans.
Because these two types of credit lines are still able to be changed by the lender, they are at the highest risk.With variable rate cards, the interest rate is tied to the prime rate, and when it goes up, so does the interest rate on your credit card or your home equity loan.
The biggest concern for homeowners who have variable rate home equity loans is that they could see their payment increase significantly. The fear is that this sort of rate hike could force struggling homeowners into mortgage default, which could start a new wave of foreclosures and the people who were lucky enough to hold on to their homes the first time around might end up in a bad situation this time.
So, what can you do to protect your finances?
- Take a look at your credit cards and find out if they have a fixed interest rate or a variable interest rate. You can find this out by calling the issuing bank and asking them. The majority of credit cards are variable interest rate. If you find that this is the case with your cards, stop using them. As soon as the prime interest rate changes, your interest rate is going to go up. The good news is that a higher interest rate won't apply to any balance you are already carrying. However, any new charges would be financed at the higher rate.
- If you have a home equity line of credit, you should probably call your lender to find out about how you can refinance. The best bet is to combine your mortgage and your line of credit into one loan. Be sure that you get a fixed rate loan in order to dodge the interest rate hike. Of course, with the housing market still in bad shape, many homeowners aren't going to be able to refinance because they owe more than their home is currently worth. But, it's worth a shot.
Are you bracing yourself for an interest rate hike? Let me know what you think in the comments.
By Melissa Kennedy- Melissa is a 9 year blog veteran and a freelance writer for PhillyJobsBlog, along with helping others find the job of their dreams, she enjoys computer geekery, raising a teenager, supporting her local library, writing about herself in the third person and working on her next novel.
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