According to Bob Sloan, S3 founder and managing partner, credit downgrades are not well understood among everyday consumers. Most Americans remember the political furor that broke out when the country’s credit rating was downgraded, many months ago now. Certainly, it was a time of much panic, skepticism, and even finger-pointing. While everyone agrees that a credit downgrade is an important and highly negative occurrence, it is helpful to look closer at what it is and what it means for consumers.
This is especially true now, with a U.S. default potentially looming and some major credit agencies threatening the country with another downgrade. That same financial upheaval could break out once again, in other words. According to Bob Sloan, S3 founder, consumers need to know what a credit downgrade would mean for them, should it ever come to pass.
Credit Downgrades at a Glance
Some consumers know from their personal lives what a credit downgrade implies. Certainly, if you have ever received a lowered or less-than-desirable credit score, you understand the implication. It basically makes it much more difficult—or rather, much more expensive—to borrow money. Interest rates go up, and your borrowing power diminishes. When the country’s credit rating goes down, the impact is much the same—only on a national scale.
Bob Sloan, S3: What a U.S. Credit Downgrade Entails
This is basically what is implied by the U.S. having its credit rating downgraded: Uncle Sam’s interest rates will surely rise. Understand exactly what the credit downgrade suggests. A credit downgrade reflects a lack of confidence that the organization in question—in this case, the United State of America—can pay back all of its debts over time.
This is what made the first credit downgrade such a huge shock. For decades, the United States has stood as one of the safest bets and surest investments there is. For the country to suddenly be called into question for its creditworthiness is something that understandably shook the nation, and the world.
When the Government Pays More…
There are several ways in which this impacts consumers, states Bob Sloan, S3 founder. The important thing to understand is that the interest rate that the United States pays on its short-term loans is determined by the market for U.S. Treasury bills. A potential credit downgrade will increase the yields on those bonds, which will in essence force the government’s hand to spend more in order to borrow the same quantity of money.
Where do consumers fit into this? Many consumer loans are linked to the yield on Treasuries. These include many mortgages and credit cards. These rates would therefore also rise.
Would a Credit Downgrade Impact Everyone?
It is important to note that a credit downgrade would not necessarily impact all consumers in the same way. Many major consumer loans come with fixed interest rates. These will not change even if the federal government sees a rising cost of borrowing.
- Far-reaching changes to the credit card industry, implemented just over the last few years, bar credit card companies from changing rates without first offering 45 days of notice.
- Credit card companies are also prohibited from raising interest rates on older purchases; only new ones can have the rates raised.
- With that said, those looking into loans for college tuition or for purchasing a new car may experience much higher rates, should the nation’s credit rating be downgraded.
- Also, some credit cards and home equity loans have variable rates, not fixed—so they, too, could fluctuate.
While not everything would change, in the event of a credit rating downgrade, many things surely would. What would be the worst-case scenario for consumers? Bob Sloan, S3 founder, says that some homeowners could be forced to default on their loans. This, continues Bob Sloan, S3 founder, could have a catastrophic effect, even ushering in a whole new housing crisis.
Bob Sloan, S3 founder, makes note that there are actually three agencies that evaluate creditworthiness of large institutions and governments. These agencies include Moody’s, Fitch, and S&P. For one agency to downgrade the country would be terrible, but not truly catastrophic unless the others follow suit. Should all three credit rating agencies agree on downgrading the United States’ standing, it could bring about a whole new financial crisis.
The implication, then, is clear: Financial and legislative decision-makers must unite in seeking to avert a credit downgrade. How can this be done? The focus must be on paying off some of the national debt—and on preventing further debts from accumulating. This is not just a matter of national prestige or of good politics; according to Bob Sloan, S3 Partners founder, it is something that could have a profound impact on the American consumer.