Devaluation of the dollar, or any other currency, happens as a natural part of the ebb and flow of economics. Though your mortgage and credit card payments aren't likely to change in such a situation, the significance of those payments in the larger context of your finances could be affected.
Devaluation is the lowering of a particular currency's value in relation to gold and currencies of other nations. For example, an increase in the exchange rate between U.S. dollars and euros -- in which the price for a euro rises from $1.15 to $1.30 -- indicates a devaluation of the dollar. Devaluation can happen simply as a result of changes in world economics, but a country may also deliberately devalue a currency to further its economic strategies.
Credit and Devaluation
Mortgage and credit card accounts don't include provisions for changes due to devaluation because in most cases you'll be paying off accounts measured in dollars using dollars. An outside valuation isn't relevant. If the dollar were devalued by 20 percent, that wouldn't reduce the balance of your mortgage by 20 percent. The exception is any credit account with a variable interest rate. As currencies are devalued, interest rates on accounts using those currencies typically rise. This could mean higher -- sometimes much higher -- minimum payments on those accounts.
Inflation and Devaluation
Devaluation is often accompanied by inflated prices -- especially those for goods imported from countries with more valuable currencies. This doesn't directly affect your mortgage or credit card accounts, but it can affect your ability to make payments. If this happens, the bank handles the account the same way it would for any other late payment or default. Lending institutions don't care whether you missed a payment due to overspending on your part or from major global economic trends.
Devaluation and Equity
One bright side of a devaluation in currency applies to equity you already have in your home. Decreased buying power of a dollar does not automatically make your home and its contents less valuable. A new assessment, adjusted for the devaluation, could increase the rated value of your home. A 10 percent devaluation would increase the value of a $200,000 home to $220,000. If you owed $180,000 on it, you'd net another $20,000 in available equity. If you owed $210,000, your home loan would no longer be "underwater."
The worst-case scenario in a dollar devaluation would be a major plummet in the value of that currency, such as what happened to German marks immediately following World War I. In that case, the money you earned or saved becomes next to worthless for buying your basic necessities. This would happen only with a corresponding collapse of major banking institutions. In that event, your mortgage and credit card bills would be low on your list of priorities, and your specific payment history would be low on the bank's list of troubles.
- John Foxx/Stockbyte/Getty Images
- Tips on Making Your Credit Score Higher
- Safe Investments for Money as the Value of the Dollar Falls
- Can a Credit Card Company Decrease My Limit?
- How Are Mortgage Rates Tied to Bond Markets?
- How to Measure FOREX Market Sentiment
- Does Using Your Margin Account Hurt Your Credit?
- Difference Between Devaluation & Depreciation
- How to Use Williams Indicators for FOREX