Credit-Land Report: Downgrade to U.S. Debt Could Lead to Higher Variable APRs on Credit Cards

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The recent announcement that Standard and Poor’s was cutting the outlook for the federal government to repay the debt it has accumulated raises the importance of the total sum of U.S debt and the government’s ability to pay back the lenders as well as to impact the pace of economic activity.

With credit cards, some credit card offers come only with variable annual interest rates (APR), which protects banks in a situation of a rising risk factor.

Standard & Poor’s downgraded the long-term outlook on U.S. debt to “Negative” from “Stable,” on April 18. There is a one-in-three chance that the nation could lose its top investment rating in the next two years and see their credit card variable annual interest rates (APR) go up.

A fall in the U.S. credit rating would force higher interest rates on Treasury bonds, and in turn, the APRs on variable-rate credit cards could go up, according to a study prepared by Arnold Taubman, a Credit-Land.com senior economist.

"With credit cards, some credit card offers come only with variable annual interest rates (APR), which protects banks in a situation of a rising risk factor,” he wrote. "In this case, if the APR is variable, namely it moves up or down depending on another interest rate, say a specific Treasury rate, then the APR will be impacted to the degree the other rate is impacted. The immediate impact for the variable APR is that it would go up because the underlying rate increase subjected to increased level of risk."

Taubman cited high unemployment and the resulting lower tax receipts as a main driver behind the ballooning deficit. In the past four years he wrote, government expenditures rose by $990 billion while revenue fell by $138 billion.

If you would like more information on this topic or to schedule an interview Arnold Taubman, Credit-Land.com senior economist, please contact Michael Germanovsky or email michael.german(at)creditland(dot)com

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