The US Credit Score Went Down — What Does That Mean for Your Money?
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Most of us know that adults have a personal credit score that reflects how well they handle their debt-to-income ratio, how quickly they pay off debts and how long they hold these debts, among other things. This personal credit score is the way institutions and people that might loan money or make other fiscal decisions decide whether it is low-risk enough for them to do so.
The United States also has an overall credit score, typically bestowed upon it by one of a few credit rating agencies such as Moodys, Fitch or Standard and Poors. Fitch just delivered America a bit of a blow by “downgrading” its rating from “AAA” to “AA+.” What does this mean for the country and for your personal money? Experts explain.
Why Did Fitch Downgrade the US?
Fitch made this assessment based on “the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance…” The rating takes into account how well a country is doing in relationship to other “peers” and the U.S. is just not rating high right now.
Fitch actually threatened this action back in May when Democrat and Republican lawmakers could not agree on the borrowing limit and the Federal Treasury was scarily close to running out of money. The rating downgrade is partly a way to get governments and their treasuries to think carefully about their decisions’ effects on the economy at large.
Fitch made its downgrade decision by looking at economic indicators, which are not pointing to a rosy next few years. Fitch expects that over the next three years, things like tax cuts, additional spending and “political gridlock” will cause our nation’s finances to “deteriorate.” It is also taking into consideration factors such as the $1.39 trillion federal deficit, which is an increase of 170% from where it was around the same time last year.
What the Credit Score Drop Means
“A credit rating is simply a rating… that is gauging the likelihood of a credit default from companies, governments, central banks, or municipalities, etc.,” said Shawn Stone, CRPC®, director advisory services at Retirement Planners of America.
The higher the rating, the lower probability of a default. The lower the rating, the higher probability of a default. “The lower the rating, the higher yield providers must give on their debt issuance to entice people to buy their bonds creating debt to operate on. Same but in opposite of higher rated companies, they will offer lower rates on debt/bonds,” he said.
No Immediate Cause for Concern
If it sounds like the kind of economic talk that you might have glazed over at in your college courses, that’s because most of this information is not going to have a direct impact on your life, at least, not yet.
Stone explained that your personal finances, or personal credit score, won’t be much affected by this drop. “This just means the cost of debt for the United States Government costs more to do business.”
However, he said the average consumer does need to be aware because “the financial health of our country is in peril if we do not make spending changes. The country operates as if they are constantly maxing out a credit card and the solution is simply to get the credit limit raised. This can cause problems down the road but nothing in the immediate future.”
So while this is what Stone called a “non-event for consumers right now” he did add that it can be a warning sign of things to come if changes are not made.
When It Does Become Problematic
This downgrade could cause some problems if “[l]enders may become more cautious, resulting in less credit available to consumers and businesses,” according to Michael Hammelburger, a finance professional and CEO of The Bottom Line Group, a finance company. “This could slow spending and investment, thereby affecting economic growth. Furthermore, a drop in credit scores may result in more loan defaults, affecting financial institutions and potentially causing banking sector instability.”
None of the experts explained how the U.S. can get back in good standing with Fitch, but lawmakers showing a willingness to work together is one possibility, as well as making strides to bring down the debt ceiling.
As of now, the markets haven’t reacted very strongly to the news, which could be an indicator that it will be only the smallest of economic shocks.
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