No one likes seeing their credit rating drop, as it’s indicative of a number of issues (poor budgeting, overspending, borrowing more than one can pay) and it increases one’s financial consequences (it’s harder to be approved for things like apartment rentals, mortgages, credit cards and loans and interest rates on all of them spike). It’s bad enough when one person’s credit score is dinged; an entire nation’s is something else entirely — and it impacts everyone in the country, from young folks to retirees.
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That’s exactly what happened on May 16, when global credit rating and financial services company Moody’s Ratings cut America’s credit rating. Find out what this means for retirees below.
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America’s Debt Drove the Cut
Moody’s Ratings operates on a 21-notch rating scale and previously, America had been at the highest notch (Aaa), but has now been cut down one notch to Aa1, per CNBC.
In a statement, the rating service explained their downgrade of America’s credit as being reflective of “the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.” This falls in line with every other major credit rating agency, who each currently have America placed in their second-highest ranking, instead of the very top.
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How Does This Affect Retirees?
Higher Interest Rates
As a consequence of America’s credit rating dropping in such a way, the cost of borrowing will likely increase, as creditors will want to protect themselves now with higher interest rates. This likely means higher interest rates for credit cards, mortgages, personal loans and more.
Decrease in Bond Prices
Such hikes in interest rates could be especially taxing on retirees. Per Fidelity, credit rating decreases can lead to deflating bond prices — retirees who hold a financial stake in bonds will want to monitor theirs for potential changes. Decreased bond values can also lead to even further increases in inflation. Further, mixed investment portfolios may become unstable as a result, which could be calamitous for retirees on fixed incomes who are living off their investments.
Overall Higher Cost of Borrowing
Additionally, an increase in interest rates would lead to higher borrowing costs for all consumers, including those retirees on fixed incomes who may not be able to afford such an increase (an example of which would be mortgage rates increasing so high as to prevent a retiree from purchasing or refinancing, a retirement home).
While the direct and total impact of Moody’s decision remains to be felt, it is as always best to not panic, but be prepared. Retirees living on investment portfolios (or on pension funds that include bonds, for instance) should monitor those portfolios closely for changes as interest rates react to this American credit downgrade.
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Sources
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CNBC, “Moody’s downgrades United States credit rating, citing growth in government debt.”
This article originally appeared on GOBankingRates.com: What Moody’s Downgrade of US Credit Rating Means for Retirees
