By Stephanie Berenbaum – August 8, 2011
What this Downgrade Means for You & Me
As you’ve probably heard, the good old U.S. of A did not have a very fruitful financial weekend. Imagine that the U.S. is a friend of yours who had a really crappy week at work. She finally makes it to happy hour on Friday, only to get dumped by her boyfriend on Saturday. Well, THAT’S the kind of week our economy just had…
What the Heck Happened?
So, what happened? The U.S. had it’s credit rating downgraded by one of the major credit rating agencies - Standard and Poors, or S&P. It’s like how we as individuals get credit scores from several different agencies. Well, so does the US government and all other sovereign nations. S&P’s system is just in letter grades, rather than numbers.
Why Isn’t AA+ Good Enough?
The U.S. was downgraded one notch – from AAA to AA+. As far as credit ratings are concerned, a AA+ is still a very good score, and on the bright side, the other major ratings agencies – Moody’s & Fitch – have yet to downgrade their AAA ratings. –Just like how you might get three different scores from Experian, TransUnion and Equifax — same deal with the government.
So, you might think, who cares? At first glance it may seem like that annoying perfectionist friend of yours in high school who would become hysterical if she got an A- rather than an A +, even though she’s still getting A+s from her other teachers. The difference is- that since its first credit rating given in 1917, the U.S. has never had less than the highest rating – thus the shock being sent through financial markets…
Is the Panic Necessary?
When you are the country whose every move defines the global economy, even a slight ratings demotion creates huge negative ripple effects. Aside from the practical considerations, the psychological ones also come into play - it’s a MAJOR blow to our nation’s ego. This downgrade signifies a loss – however small – in confidence in the U.S.’s ability to pay its debts and control its finances – much like when an individual’s credit score is downgraded.
What Does It Mean for You & Me?
Whether you are an individual or a nation, when your credit score goes down, the cost of borrowing money goes up. And if the government has to pay more to borrow more money, then chances are so will we…OUCH! This is because many consumer loans, like credit cards, mortgages, car and college loans, are influenced by the rate the government pays on its bonds (ie. the interest rate the government pays to borrow money).
As you probably know, some interest rates you receive are fixed, but some are adjustable. If you have loans with adjustable rates, then you should be keeping an even closer eye on this developing story. For example, someone who has locked in a low 30-year fixed mortgage rate will be sleeping easier tonight that someone with an adjustable rate mortgage. This is exactly why having an adjustable rate on something is riskier than a fixed rate!| Print
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