Debt ceiling and your money: Now it's getting personal

July 29, 2011: 9:16 AM ET

NEW YORK (CNNMoney) -- With less than a week to go before the nation's borrowing limit must be lifted, the debate over the debt ceiling rages on, with your money hanging in the balance.

Even though the possibility of a default seems unlikely, credit agencies have warned that they will downgrade the nation's credit rating if Washington cannot hammer out a debt deal soon.

If the U.S. loses its top AAA rating, the nation will no longer benefit from having the lowest lending risk and therefore, the lowest interest rates. That's where you come in.

The government's borrowing rate is the base line from which other borrowing rates are determined, explained Greg McBride, senior financial analyst for Bankrate.com. "Driving up Uncle Sam's borrowing costs is also going to drive up the borrowing costs for everyone else," he said.

Without that prime rating, all lenders will demand a higher rate of return on their investments -- and that means higher rates on credit cards, student loans, mortgages and car loans.

Credit Cards

Credit cards are the easiest form of credit, and about three-quarters of Americans have one, according to Bill Hardekopf, CEO of LowCards.com and author of "The Credit Card Guidebook."

Most credit cards, though, are tied to the prime rate, which is not likely to change. What could happen, however, is that issuers will raise the margin they charge above the prime rate even further. So, for example, instead of an APR roughly equal to the prime rate plus 10%, an issuer may charge the prime rate plus 11%, McBride said. "If Uncle Sam is a riskier borrower then so are a lot of other borrowers, and card issuers are very quick to mitigate their exposure to additional risk," he noted.

The average credit card annual percentage rate, or APR, is currently 14.08%, but could potentially jump at the issuer's discretion. In that case, issuers have to give you 45 days notice.

When you'll notice: Within two billing cycles.

Mortgage rates

Fixed mortgage rates are priced in direct relation to the yields on 10-year Treasury securities. So, in the case of a downgrade, fixed mortgage rates would rise roughly in lockstep with any bump up in the 10-year Treasury yield, according to Keith Gumbinger of mortgage rate tracking firm HSH Associates. For example, if the 10-year yield rises by a quarter of a percentage point, that means a 30-year fixed rate mortgage could jump to 4.87% from its current average of 4.62%.

Although that rate is still relatively low, no one would welcome a higher mortgage rate, Gumbinger said. Very low interest rates are currently providing support for the real estate market, and any increase in costs might cause some borrowers to rethink purchasing a home, he explained. In addition, fewer consumers would qualify and fewer mortgages would be issued, further depressing an already weak housing market.

When you'll notice: For new loans, the impact will be immediate. Existing adjustable-rate mortgages will be impacted when those loans are scheduled for a reset.

Student loans

Most students with federal loans have rates that are already set by the government. The interest rate for subsidized loans is 3.4% this year for undergraduate students but jumps to 6.8% next year -- regardless of market conditions.

However, the interest rates on private student loans could rise, impacting those students with variable-rate loans or those who plan to take out a private loan for the next school year. Most students don't fall into this category, however, said Lauren Asher, president of the Institute for College Access & Success. According to the most recent tally, which was compiled four years ago, only 14% of all undergraduates receive private student loans.

When you'll notice: Next year or never depending on the type of loan.

Car loans

In the case of rising interest rates, "most of the lenders in the business would have a fairly quick impact to their cost, so the movement of pricing would be very rapid," said Paul Cuevas, director of auto finance at J.D. Power & Associates.

Considering the five-year note for a new car loan is around 4% and the average amount financed on a new car is $27,173, even a 1% rise in rates would only mean a difference of less than $12 to a monthly payment. "It doesn't have the same devastating impact as home mortgages because the payment differential is not as significant," said Cuevas.

"[That sum] would not make the difference between a person deciding whether to buy a car, but it does impact discretionary spending capabilities -- and that impacts consumer confidence," he added.

When you'll notice: Immediately.

Money market and savings accounts

Even though interest rates may rise, that doesn't mean you'll reap the benefits of a higher rate on your deposits. "A credit downgrade and higher interest rates will be a hindrance to the economy and loan demand, not a boost to it," McBride explained. And less demand for loans means there is less incentive for banks to try and get their hands on your cash.

Since banks don't need to pay you more to stash funds in a savings account or money market account, those interest rates will likely stay put until the economy gets better and more people want loans. Only then, will banks pay you more for your money.

When you'll notice: Never.

Investment portfolios

Of course, any type of downgrade would have a negative impact on your investments and retirement accounts as well.

For starters, there would likely be an immediate sell off, sending prices for both stocks and bonds lower. In addition, a loss of confidence would only heighten the uncertain economic environment going forward, according to David Joy, chief market strategist at Ameriprise Financial. "Corporate profits won't be as strong as we hoped, creating an additional headwind, making equities less attractive," he explained.

The same goes for corporate and municipal bonds, he said. Just as corporate earnings would fall, the ability of corporations or local governments to service their own debt would decline as well. And that would leave your stock or bond portfolio worth less than it did before.

When you'll notice: Immediately.

Are you in extreme debt and can't pay your bills? E-mail Erica.Fink@turner.com if you'd like to be included in an upcoming CNNMoney story or video. Please indicate in your e-mail if you're interested in being in a video.  To top of page

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