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By now, you’ve probably heard that an organization called Standard & Poor’s (S&P) downgraded the U.S. government’s credit rating in August 2011, prompting consumers to wonder how this move, coupled with our nation’s trillion-dollar debt, could impact them.
First of all, don’t expect big changes. Much of the financial wrangling in Washington has more to do with politics rather than anything that would significantly impact you, your current ability to access credit, your debt management plan (if you’re on one) or anything else you do on a daily basis – at least for the immediate future.
However, you should be aware of what happened, who’s involved, and how you should plan for your financial future.
Technically speaking, S&P lowered the U.S. government’s long-term sovereign credit rating from “AAA” to “AA+.” Sounds confusing, right? Here’s what it really means.
S&P is one of three major agencies (Fitch Ratings and Moody’s Investor Service are the other two) that assign credit ratings, or grades, to entities based on several factors including their ability to access credit and pay down debt. Such financial market intelligence helps investors understand the risks associated with certain investments so they can make better-informed decisions about where to invest their money.
S&P’s downgrade is basically a gentle warning to investors that taking on American debt – by purchasing U.S. Treasury bonds, for example – might not be a stellar investment because returns might not come in a timely manner, or at all.
Note however that “AAA” is the highest rating given and the downgrade only dropped one level. Further, the other two major credit rating agencies still rate America “AAA.”
What did S&P do and why is this important?
The S&P’s move to downgrade America’s credit rating is similar to when a credit reporting agency (e.g. Equifax, Experian or TransUnion) lowers your credit score because it thinks you aren’t making good decisions about your finances. These agencies look at your history of making payments on your car loan or credit card debt. If a reporting agency sees that you have several unpaid bills or an established pattern of always paying bills late, for example, it will lower your credit score, which makes it more difficult or more expensive for you to access credit.
This consumer concept is similar to S&P’s credit downgrade of American debt.
Prompting S&P’s decision were month-long battles in Congress over how much credit access the United States should have to enable current and future spending, as well as work toward repaying its debt, because our government was about to reach its credit limit. Some people in Washington wanted America’s credit limit (also called its “debt ceiling”) increased to meet future spending needs. Others thought our spending habits and current trillion-dollar debt were too extreme and didn’t want the government to take on any more debt.
After a lot of political haggling, legislators approved a motion to boost America’s credit limit, which raised the debt ceiling, or maximum amount of money the U.S. could borrow, through 2013. This move was met with some big spending cuts to reduce or eliminate certain government programs.
S&P felt that the spending cuts promised by our government didn’t go deep enough in order to provide for a stable financial future, and so it responded with the downgrade. The net result is that the downgrade could influence how expensive it will be for our government to borrow money or access attractive forms of credit in the future.
What does this mean if I’m on a debt relief plan?
Interest rates on consumer credit cards don’t seem to be impacted by the downgrade for now. So if you’re currently participating in a debt management plan, continue making the payments established by your credit counselor. Don’t expect those payment amounts or your negotiated interest rates to change.
However, note that some experts think credit card interest rates could eventually climb a bit, so continue working hard to lower your debt and make timely payments so that if interest rates do rise, you’re in a better position to maintain your existing rate.
Will I see any other impacts from the downgrade?
Possibly. For example, if you have loans based on short-term interest rates, like student loans, you might see those rates climb.
Meanwhile, the Federal Reserve, which is the central bank for the United States, has promised to keep its benchmark interest rates low through 2013, so this may be a good time for homeowners to refinance or for consumers to purchase a home because many rates are projected to climb in a few years as the economy rebounds. Talk to your lender for specifics pertaining to your situation.
Stick to your long-term plans
S&P’s downgrade may be more about politics and represent one credit agency’s opinion of the state of the U.S. economy. But perhaps it’s also comforting for consumers struggling to make ends meet to know that the folks in Washington are struggling with their budgets, too.
The key is to stick to a plan of chipping away at your debt while uncovering new ways to curb spending or boost your income. Regardless of what happens to our national economy, many of us still need to reduce our own personal deficit. Let the legislators and regulators in Washington worry about theirs.
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