Saturday, August 6, 2011

What does the US credit downgrade mean?



I have been asked what are the implications of a downgraded credit rating? It is no different than an individual getting a bad credit score from Equifax. A bad credit score means the person wanting to borrow money is damage goods to lenders. It means lenders will increase the borrowers interest rates. Since the downgrade, America is damage goods. Americans will see interest rates rise. It means each American will be paying more interest on their loans. There will be an ugly domino effect because of higher interest rates.

(ZeroPassiveIncome) The US credit rating has officially been downgraded. Losing our fiscal badge of honor – that sterling AAA rating – was once unthinkable and will likely send rippling effects to us as consumers. Today’s money question – what does the US credit downgrade mean? and how does it affect you?

Credit Ratings – What Does It Mean?

By down grading the US credit rating from AAA to AA+, Standard & Poors, one of the three biggest and most respectected rating agencies is saying that it thinks the US government is a slightly riskier bet when it comes to paying its loans on time.

These ratings are similar to the Experian, TransUnion, and Equifax credit scores received by invidivuduals. If an individual has a low credit score, it’s likely that they’ll have to pay higher interest rates on loans.

Similarly, if a country receives a lower credit rating, they’ll have to pay higher interest rates to their lenders. The United States currently has over $14 trillion dollars of debt - much of it issued to foreign banks and other countries like China. The down grade of US credit would increase the interest rate by approxiately 0.5%. That increase in interest will lead to as much as $75 billion dollars of additional interest payments per year.

Increased Interest Rates – How Does It Affect You?

An increase in the US interest rate translates to is higher borrowing costs for all of us.

Increased interest rates – Most consumer and business credit lines like mortgages, student loans, and credit cards should all see an increase in interest rates immediately. Half a percent increase in the interest rate could increase the total cost on a traditional fixed mortgage by $19,000, on average.

Higher interest costs lead a slowing of the economy – The higher the interest rates are, the less likely it is that businesses and consumers will spend on credit. That means less consumer purchases, less vehicles bought, and less homes built and sold.

Less purchasing means less jobs – Because of the slowing of sales do to increased interest rates jobs will have to be cut. Some estimates are saying that a half a percent increase in the interest rate could lead to a loss of hundreds of thousands of jobs.

So pull up your boot straps – cuz we’re in for a wide ride. Looks like we’re in for a double dip recession.