How will the U.S. Credit Downgrade Affect Consumers?

When Standard & Poor’s, one of the three main credit rating agencies, decided to downgrade U.S. government debt from the highest rating (AAA) to the next lower rating (AA+), it caused a whole lot of volatility on Wall Street and prompted a rapid response from President Obama.   But how will the downgrade affect consumers directly?  Will it change interest rates on things like credit cards and mortgages?

Finding an answer to that question is a bit complicated.  Any changes will likely not happen immediately, but could take weeks, months or years.  And different types of interest rates may be affected differently:

How Will the U.S. Credit Downgrade Affect Credit Cards?

For the millions of Americans with credit cards, the specter of potentially higher interest rates in the near future is a frightening prospect.  Fortunately, the credit rating downgrade will not automatically cause this to happen.  Credit card interest rates are usually based upon the prime rate, which is set by the Federal Reserve, and the Fed has vowed to keep interest rates at their current low levels for the next two years or so.

Whether they’ll stick to that is anyone’s guess, but another thing working in consumers’ favor is a law passed by Congress in 2009 that prohibits credit card companies from retroactively raising interest rates on balances you’ve already accumulated.  In other words, if you have $4,000 in credit card debt today and your credit card company raises your rate, you’ll continue paying the old rate on your current balance of $4,000 and will only pay the higher rate on spending that occurs tomorrow and beyond.

If you’re surprised that Congress actually did something concrete to help the average American consumer… well, you’re probably not alone!

How Will the U.S. Credit Downgrade Affect MortgagesHow Will the U.S. Credit Downgrade Affect Mortgages?

Like credit card interest rates, many Adjustable Rate Mortgages (ARMs) are based upon the rate set by the Federal Reserve.  Those that are will likely not be affected immediately (if at all) by the credit rating downgrade.  Some ARMs and many fixed rate mortgages are tied to the yield on U.S. treasury bonds, which showed no signs of increasing in the aftermath of the downgrade.

While the S&P’s downgraded the U.S. credit rating, it also concurrently downgraded Fannie Mae and Freddie Mac, two government-backed entities that guarantee almost 50% of all mortgages across the country.  That could increase mortgage rates in the future, but any such changes would not happen immediately.

How Will the U.S. Credit Downgrade Affect Gas and Heating Oil?How Will the U.S. Credit Downgrade Affect Gas and Heating Oil

The price of crude oil had dropped since the U.S. credit downgrade, as fears of another recession led investors to believe demand for gas and oil would drop.  However, it would be unwise to count on these lower prices lasting for long, because so many factors have the potential to change the cost of oil at a moment’s notice.  For example, the ongoing conflict in the country of Libya, which supplies a fraction of the world’s oil, has made oil prices higher than they otherwise would be.  If that conflict were to end any time soon, it would have a noticeable affect on those prices.

The bottom line is that consumers should not be too worried about seeing any immediate changes to their interest rates or the cost of basic goods because of the credit downgrade.  As with any economic matter, no one can predict for sure what will happen.  So far, the other two major ratings agencies besides S&P have not downgraded the U.S. rating.  As long as they still rate U.S. debt at the highest level, any long-term effects of S&P’s decision will be more subtle.

Image 1 by Casey Serin
Image 2 by paulswansen

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