In early August 2011, the Standard & Poors (S&P) rating agency made history by lowering the U.S. debt rating from AAA to AA+. Within days, the Dow took another drastic dip to the tune of 640 points. Amidst endless debt ceiling negotiations, a soaring unemployment rate, and an uncertain financial future, many consumers began to panic and asked themselves, “What does this mean for me?”
Before delving into the effects upon consumers, it’s important to understand the basic meaning of the U.S. debt change. When the S&P announced the downgrade to AA+, they effectively downgraded the government’s creditworthiness on a worldwide scale. This change results in a number of consequences for the government and U.S. banks, including:
- The government must pay higher interest to Treasury bond investors to cover the debt rating’s increased risk
- Old Treasury notes decreased in value overnight in favor of new bonds with a higher interest rate
- Banks will pay more to borrow from the Federal Reserve
- Banks will be forced to spend more to maintain their cash reserves, compelling them to find the funds from means other than customer CDs and savings accounts
Consumer Impact: The Pros
Washington and Wall Street aside, the immediate effects of the government’s credit rating are positive for some. Just as the interest rates increased on Treasury bonds, the downgrade will likely force an interest rate increase on CD’s and savings accounts as well. If you are well invested in a stable vehicle or boast a big savings account, the increase in interest could have an obvious upside.
Consumer Impact: The Cons
Despite reassurances from brokers, lenders, and even heads of state, many are still wondering if the credit rating decrease is merely a blip. Borrowers in particular could feel the effects of:
Unsecured debt. Since U.S. banks are forced to pay a higher price for the cost of business, it is possible that interest rates on credit cards and private loans could increase to make up the difference. In addition, the ability to secure a loan could become more difficult in the coming months. While banks are trying to balance their own checkbooks, they may be less likely to add to yours.
Secured debt. While asset-supported debt won’t be experiencing immediate increases, the interest rates attached to mortgage and auto loans could go up as time progresses, making it more difficult to find an affordable option where many existed before.
What About Federal Regulations?
Many consumers are outraged at the impending interest rate hikes, leading them to cite the recent Credit Card (CARD) Act, which protects the way cardholders are billed for new and existing revolving credit accounts. While the CARD Act states that creditors must give clients ample notice before increasing rates, the unfortunate truth excludes cases of attached index increases (i.e., increases in the bank’s prime (best) borrowing rate).Not only does this change escape the confines of the CARD Act’s legislation, it means that your credit card interest rates could increase without your knowledge.
What Can I Do?
While the fallout of the U.S. economy cannot be altered by the average American, there are things you can do to minimize its effects on your life.
- Review your credit card statements. Credit card companies are not legally obligated to inform you of increases in the prime rate, so check your interest rate to verify its value. As rates rise, your balance could follow it more rapidly than you expect.
- Refinance. If your credit is in good shape, consider refinancing your mortgage while interest rates are low. Although rates are not projected to see an immediate increase, you have nothing to lose by saving on your mortgage now.
- Pay off debt. Once interest rates increase, your ability to pay down debt will become more difficult with each passing day. Get ahead of the problem by attacking it now. Assess your budget, and pay off as much debt as possible.
While the AA+ rating may be unsettling, analysts continue to provide assurances regarding our nation’s long-term stability. One thing is certain: Although the economy cannot change overnight, you still have the power to affect change in your own household. Set an example by following a straight and narrow path.