Does a Credit Rating Downgrade Mean an Upswing in Rates?

The unprecedented decision of Standard and Poor’s to downgrade the credit rating of the United States Government has caused a global economic commotion as markets fluctuated dramatically since the new rating was announced. However, analysts say that America’s new, less-than-stellar AA + credit rating should have minimal effect on consumers. At least:   in the short term.

“In practical terms for Americans, the downgrade means little,” said Steve Darden, Shreveport Wealth Advisor for the Louisiana-based news source, the Shreveport Times. “S&P’s statement was more about politics than anything.”

S&P also proceeded to reduce the credit ratings of government-backed mortgage lenders Fannie Mae and Freddie Mac. Together they either own, or guarantee, nearly half of all the mortgages in America. That may eventually result in higher mortgage rates for new borrowers because fixed-rate mortgages are usually tied to 10-year Treasury bond yields. However, anyone currently in the market for a new home still has plenty of time to take advantage of the historically low mortgage rates that have been advertised nationwide over the past several months. It will likely be some time before any rate increases occur.

The interest rates on credit cards should not see any rapid, dramatic increases, either. That means that there is still some opportunity for anyone carrying a balance to snag a tempting 0 balance transfer offer. According to the Trans Union credit bureau, individual consumers have an average of $4,950 in credit card debt. Those current balances are protected under the CARD Act of 2009. So with that in mind, should there be a spike in rates, only new charges would be subject to accruing interest at the higher rate.

Most credit card rates are based upon the prime rate, which is, in turn, based upon the rate determined by the Federal Reserve. That rate is at which they lend out money to banks and other financial institutions. The current rate, which stands at zero-to-0.25 percent, was established during the global financial crisis of 2008. The Federal Reserve announced recently that it intends to keep short term interest rates near zero though mid-2013.

The rate downgrade does indeed seem to be, as Steve Darden said, a “shot across our bow,” one which was aimed at politicians, not American consumers, as reported on the Shreveport Times’ website.