How does the deficit affect credit card interest rates?

[lizzieforkerry]

I need to win an argument in which one shouldn't carry a balance on credit cards because of the large deficit, and somehow have * to blame for it all. But it has to be an answer that everyone will understand. Can you help me?

[SheilaT]

1. It doesn't.

There's no real connection between the deficit and credit card interest rates.

Credit card interest rates depend essentially on which state the particular credit card comes from, because those interest rates are set by each state. And certain states (I think North Dakota and Delaware are two of these) allow very high interest rates.

Your personal consumer debt is your personal problem, and has almost no connection with the federal debt. It is possible that somewhere down the road, as the national debt grows ever bigger, the government will cut back on its spending in certain areas, such as school funding or medicare or social security, and a little later down the road people will lose jobs because of that, and perhaps you will personally be impacted. And if you have large consumer debt that you're having trouble paying off . . . well, you can go from there.

But not carrying a balance on credit cards is simply a personal financial decision.

[OneTwentyoNine]

2. They do in the long run....

Interest rates on cards are tied to the Prime rate,the more it goes up the more the interest rates on cards go up. Yeah,there are State caps on interest they can charge but hell,some States are as high as 25-30%.

As the interest rate slid downward during the Clinton years so did the interest rate on cards--that when the flood of low interest or 0% interest started up. Those offers are still out there for those with good credit but the rates on cards are starting to rise.

[Jacobin]

4. Rong

Only a couple of states limit credit card rates...Arkansas is one.

Credit card rates are tied to the prime rate, which will increase over time as deficits rise. Its like a seesaw and its inevitable, although it doesn't happen all at once.

[Jacobin]

3. As the deficit rises, eventually the prime rate will have to increase

to slow inflationary pressures and to attract more foreign money (to buy treasury bonds which finance the deficits).

When the prime rate rises, credit card rates are pegged to the prime rate (like prime plus 7 percent, or whatever your contract calls for) and your credit card rates will increase.....very significantly

[ovidsen]

5. No connecton in the short term.

Theoretically, an increase in deficit spending will lead to more federal borrowing; a higher demand for a fixed supply of available cash; and an increase in interest rates.

But with the Federal Discount Rate at 4.25%, and folks who know lots more than me saying we're not gonna see skyrocketing interest rates at that level anytime soon (no matter how much Uncle Sam borrows), the question of credit card rates centers on 1) how good your credit is, and 2) How much banks can charge until you tell them to stuff it.

For now, at least, credit card rates have far more to do with consumer demand (and what banks can get away with) than the deficit. And swwearing off credit card debts probably won't affect either interest rates or the deficit.

But go ahead and blame the Chimp and his fellow Rethugs for the federal deficit, which is ballooning for reasons we're all familiar with.

Remember when the GOP used to deride Democrats for "tax and spend" policies? Well, with Bush and Co.'s silly tax cuts for the rich, it's now "borrow and spend". Or maybe "spend and spend".

And sooner or later, somebody's gotta pay.

[skids]

6. It has to do with the value of the U.S. dollar.

There are two main deficits -- trade and federal government. Here
we are talking about the trade deficit. The recent news is the federal government deficit, which has a similar effect but different than the trade deficit.

When we get stuff from overseas but don't pay for it, someone has to underwrite that debt. When the U.S. government spends money it doesn't have, someone has to loan it to them. Nowadays, that is usually a foreign investor. That foreign investor gives a bank in the U.S. money, and expects to come back years later to collect that money, with interest. Also there are government bonds that give interest.

If the FED keeps interest rates too low, then the value of the dollar (and bonds) goes down because there are other countries where these foreign investors could make more interest by loaning money. So while the FED always states in the news that they raise the rate to prevent inflation, they also have to keep an eye on this.

A larger deficit (either one) means the country is more of a risk. If our economy tanks, or the dollar tanks, then those foreign investors will take a big wash. Raising the interest rate makes it more worth the risk. When the FED raises the rate, the credit card companies can't buy loans as cheap, so they pass this rate increase on to the credit card holders.