What government default could mean to consumers

Wednesday, October 16, 2013

What a government default mean to consumers

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Fred Shropshire
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RALEIGH (WTVD) -- There are some signs of distress in the financial markets as the political gridlock grinds on in Washington.

At least one credit rating agency has warned of a U.S. credit downgrade may be coming.

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After a down day on Wall Street Tuesday, some say we're seeing the effects already, but what happens if Congress can't compromise on the debt ceiling?

"A default and not being able to pay the timely interest and principle is definitely going to be a shocker," said Raleigh financial planner Troy Smith.

Smith says interest rates could rise.

"People who have money in the bank are going to get more earnings on their money," said Smith.

While that's a blessing for savers, it's a curse for borrowers.

A default could make zero percent interest rates on car loans a thing of the past, and refinance opportunities to lower mortgage rates would take a hit too.

So, if you're thinking about buying, Smith says to lock in your rate now.

"You want to make that transaction happen so you're not affected by larger interest rates later on," said Smith.

In addition, a default would mean the government, which makes up about 20 percent of our economy, couldn't pay its bills. That means no Social Security, Medicare, or military and veterans benefits.

That's the reason the Fitch credit rating agency warned Tuesday that it's reviewing the United States' AAA credit rating. That said, however, Smith is optimistic.

"We've had very little change," said Smith.

He notes interest rates had fallen and the country is still creating profits following the Standard and Poor's U.S. credit downgrade in 2011.

"We still are the strongest in the world and still will be if we go through a default and come out of it," said Smith.

Our 401Ks and other stock investments could see volatility.

The advice from Smith and other financial planners is to leave long-term investment dollars in the stock market.