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Debt-rating reduction could raise cost of mortgages, credit cards

August 17, 2011

| Money Rates Columnist

Although the recent downgrade in the United States' debt rating by Standard & Poor's sent shock waves through the stock market almost immediately, many consumers may not start feeling the pinch for several months if their home loans, credit cards and home equity credit lines become more costly as a result.

The effect on current mortgage rates

Although current mortgage rates and refinance rates were not immediately affected by the S&P decision, the agency also downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac, which are backed by the federal government.

That means that current mortgage rates and refinance rates could climb for new borrowers, the Associated Press said--a large number of people, considering that Fannie and Freddie guarantee half of all mortgages in the U.S.

Although it may be a while before home loan or refinance rates climb, the Washington Post noted that fixed-rate mortgages are tied to the yield on 10-year Treasury bonds. Those yields haven't climbed yet.

Variable-rate mortgages

Variable-rate loans and home equity loans could also cost more, which could have an impact on your checking account. Although adjustable-rate mortgages, or ARMs, are rare since the 2008 housing collapse--caused in part by too many borrowers defaulting on loans when their rates adjusted upward--many still in existence could go up. The same is true for home equity loans, which are typically variable-rate accounts. But the Post notes that these accounts are usually dictated by the federal funds rate set by the Federal Reserve, which is trying to keep interest rates low.

Credit card rates

Although market forces reacting to the debt rating downgrade could send credit card interest rates higher, your current account balance--the average balance in the U.S. is just under $5,000, the AP reports--will not be subject to rate hikes thanks to 2009 credit card reforms passed by Congress.

It remains unclear what kind of long-term impact the debt rating reduction will have because the S&P decision is unprecedented. Two other credit rating agencies, Fitch's and Moody's Investors Service, did not cut the U.S. rating, and prices and demand for U.S. government debt increased right after the downgrade. If the rate increases to make the bonds more attractive to leery investors, the Post said, borrowing rates may also climb.

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