Last Friday, the S&P downgraded the US credit rating from a perfect, no-risk AAA rating to a AA+ rating. There are a few reasons why this was done, including the debt crisis in Europe, our $14 trillion debt, and the inability of Washington to get anything done with regards to a deficit cutting solution, as explained below.
The stock market plummeted today as the S&P also downgraded Fannie Mae and Freddie Mac’s credit rating. But as everyone around us seems to be freaking out, what does this rating downgrade actually mean for you and me?
As of right now, nothing. If you are involved in the stock market it could have implications, but for the average student, nothing will really change. There is a chance that interest rates on mortgages, credit card debt and student loans could increase in the future, however.
If you plan on buying a home soon, you may face higher interest rates, but probably not for a while. Fixed rate mortgages are usually tied to the yield on 10-year Treasury bonds, but it is not likely that yields will rise just because of the downgrade. Variable rate mortgages might be more prone to increased interest rates, but again nothing will change in the immediate future.
What about those with credit card debt? According to The Washington Post, consumers carry an average of $4,950 in credit card debt in the US. But, thanks to new regulations passed in 2009, the downgrade will not result in higher interest rates on current credit card debt. Credit card rates are usually based on the federal funds rate anyways, which is controlled by the Federal Reserve, not the Treasury. According to most sources, the Fed is not likely to increase that rate anytime soon, so credit card holders should be safe.
Those with student loans should be safe for now as well. Federal student loans have fixed rates until 2013. Those with private loans could see their rates go up in the future, but probably not until after 2012. Those who are taking out new loans in the future might need to be a little worried, as those are the only loans that could have a higher interest rate in the near future.
So, overall, don’t worry. There are no immediate effects as of now. The S&P is the only rating agency to downgrade us so far, and according to Obama, we’re “still a Triple A country,” thanks Mr. President. This is the first time in history the US credit rating has been downgraded, so loans on anything from cars to appliance could go up in the future, but for now I would say that everything is fine.
Feel free to leave any questions or comments below!