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What Does America’s Credit Downgrade Mean for You?

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There’s lots of bad news surrounding the announcement by Standard & Poor’s to downgrade the credit rating of the U.S. government. The decision will make it more expensive for the country to borrow money, adding to the national debt, and the announcement has thrown the stock market into a serious tizzy.

But here’s a surprise: For some consumers, the credit downgrade could actually be good news. People who save money, whether in the form of savings accounts, CD’s or Treasury bonds, could actually be benefit.

The bad news is that people who borrow lots of money could be hurt.

“Savers may be helped by this change,” says Cheryl Garrett, a financial expert and founder of Garrett Planning Network, a financial planning company based in Kansas.  “Borrowers are going to be negatively affected.”

Good News for Savers

Here’s how this works. When S&P announced it would downgrade the American government’s creditworthiness from AAA to AA+, it means the government will have to pay higher interest to investors buying Treasury bonds (since there’s a slightly higher risk than there was last week that those investors won’t get repaid).

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That one change has lots of large and small effects downstream. Many large banks sit on large piles of Treasury notes, as well as gold and cash, because they are required to have some amount of hard reserves on hand as equity for all the credit they’ve extended. All of  a sudden, those Treasury notes are worth less now than they were last week, Garrett explains, because investors would rather buy the new bonds with higher yield than the old ones in banks’ vaults, which have lower interest rates.

In addition, banks borrow money from the Federal Reserve, and the lower credit rating will make that money more expensive to borrow. Meanwhile, banks will be forced to pay consumers somewhat higher interest rates on CD’s and savings accounts, Garrett says, because now those same consumers could earn more money buying Treasury bonds, so banks must raise their rates to compete.

All of that adds up to the silver lining of this story: If you have money saved up, or invested in super-stable things like CD’s and Treasury bonds (which have so little risk they’re seen as equivalents to savings), you probably will win out, in the form of slightly higher interest rates.

“If interest rates do go up that’s good for savers, because savers have been suffering with low interest rates for years,” says Gerri Detweiler, Credit.com’s consumer credit expert.

Image by ibaelen, via Flickr.com

Bad News for Borrowers »

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