What The US Credit Rating Downgrade Means for You

by Cameron on August 9, 2011

Standard and Poor recently downgraded the United States’ AAA credit rating to AA+. Much of the political debates recently have been on what a disaster it would be if the United States got downgraded. Republicans were trying to make large cuts to the government’s spending while the Democrats wanted to increase taxes. The downgrade happened though. How does that downgrade affect you though?

First off, know that other countries have suffered a downgrade to AA+ and been fine. Japan was downgraded in 1998 and is still going strong. S&P is a little stricter on its AAA ratings than Finch and Moody’s. According to S&P, there are still 18 AAA rated countries: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey(off the coast of Normandy), Hong Kong, Isle of Man(between Great Britain and Ireland), Liechtenstein(between Austria and Switzerland), Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom. Obviously, the United States would prefer to have a AAA rating, but a AA+ rating is not going to be the end of America.

Stocks: During this economic turmoil, the downgrade adds more fear and uncertainty to the stock market. As all investors know, economic fear is the enemy of overall gains. Amateur investors should rethink their positions with this downgrade. This fear is a good reason to dial down your investment risk. You do not have to get out of the market, but you should be aware of any extra risk you are taking.

Credit Cards: Credit card rates are attached to the federal funds rate by the prime rate. Credit card rates could increase if the prime rate increases or if credit card issuers fear an increase in the prime rate. Be aware of any interest rate increases by your credit card company.

Loans: Students dependent on private student loans might suffer some in the upcoming years. Any increase in borrowing costs will be passed on to those borrowing. Federal student loan rates, however, should remain fixed. Shop around for student loans. Don’t accept just any offer that is presented to you. You need money, but there are plenty of lenders.

Taxes: Most of the effects that we see from the downgrade will be on the government. The government will have increased borrowing costs because of the downgrade. This increase might spur the government to increase taxes since it recently increased spending. Government services might be decrease in the near future because of the added expenses. The government will be looking to make the money back that they are losing through borrowing costs. Obviously, citizens don’t want a tax increase, but it might be coming.

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