August 8th, 2011

6 Tips on Dealing with the U.S. Credit Downgrade

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There’s a lot of information floating around the World Wide Web about the recent U.S. credit downgrade. But what is the important information that consumers should know? Here we go over a few basics and what you should do in light of the changes in our economy.

Credit Ratings: The Big Three

treasury

The three noteworthy international Credit Rating Agencies (CRAs) are Standard & Poor’s (S&P), Moody’s and Fitch Group. Just as Equifax, Experian and TransUnion decide how creditworthy you and I are by assigning us credit scores, the CRAs determine the creditworthiness of national governments by giving a credit rating ranging from AAA to D.

These credit ratings guide other countries when it comes to backing a nation’s debt. The U.S. used to hold the highest credit rating (AAA) by all three CRAs, but that changed on Friday, Aug. 5. This is how the U.S credit rating ranks in each CRA now:

Standard & Poor’s: The U.S.-based company downgraded the country’s credit rating from AAA to AA+. John Chambers, head of Sovereign Ratings for S&P, gave two reasons why: the political infighting that took place during the debt ceiling debate and the lack of a better plan to tackle long-term debt.

Moody’s: Although the New York City-based agency has not yet downgraded the credit rating of the U.S., it has given the country a “negative” outlook.

Fitch Group: Headquartered in New York and London, Fitch is the only one that has yet to downgrade or give a negative outlook to the U.S’s credit rating. However, that may change when their review of the country concludes later this month.

How should I react?

With the U.S.’s credit downgrade by S&P, consumers will also be affected. Those with stock investments will likely be hit negatively. Also, nations investing in riskier U.S. debt will charge higher rates to the country, which will trickle down as higher loan interest rates to consumers. We may also begin to see increases in some consumer pricing.

Amidst all of the forthcoming changes, how should you react with your own money?

First of all, don’t panic. It’s not the time to lose your head; it’s time to use it. Here are a few tips on how to deal with the U.S. credit rating downgrade:

  1. Diversify your stocks. If you’re already invested in the stock market, make sure your stocks are properly diversified. Like Elle suggests in our Community Karma post, do your research to be sure you’ve chosen wisely and have varied investments. That way, if the market continues to decline, you won’t have invested all of your funds into singular vehicles.
  2. Make sure you’re not overexposed to stocks. Personal finance guru Alan Haft suggests sticking to the “Rule of 100,” which states an individual should subtract his or her age from one hundred to find the maximum percentage that their money should be exposed to stocks. Being overexposed puts you at a much higher risk for loss.
  3. Don’t fret over your long-term investments. Unlike some short-term investments, your 401(k) is meant to work for you over a longer period of time. That means that you shouldn’t “make any knee-jerk, emotion-driven movements” advises personal finance writer Farnoosh Torabi. Take a look at your 401(k) investments. If you’re young, you can afford to be riskier in your investments, but if you’re closer to retirement age, allocate your investments toward more reliable sources like bonds and CDs. The economy will likely recover during your 401(k) investment’s lifetime.
  4. Keep your FDIC-insured deposits. These savings accounts are typically insured up to $250,000 per depositor, per institution, reminds MSNBC. Historically speaking, economic recessions occur every five to six years, Torabi says. Keep some money secure in liquid savings before investing in more risky vehicles like stocks.
  5. Brace for consumer loan interest rate increases. As U.S. debt becomes riskier, creditors will likely charge higher rates for holding it. Those rates will trickle down to consumers in the form of higher home loan payments for new borrowers and an increase in home loan payments for those with adjustable-rate mortgages. You can also expect credit card, personal loan and auto loan interest rates to increase.
  6. Build your emergency fund. Rate increases combined with uncertainty in the markets means that you should reprioritize your emergency fund. It’s always a good idea to have a cushion of an emergency fund, and if you’ve been neglecting yours, take the time to set a bit more aside each month. Invest in yourself first.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.

4 Comments

  1. I think it’s very important, now more than ever, to make sure your bank is FDIC insured. Financial institutions are taking really hard blows, and you want to make sure your money is protected. Building (or starting) an emergency fund is also a great tip. We can’t rely on our government to protect us and our money anymore, so it’s important to take matters into our own hands to make sure we can get by during these hard financial times.

    CreditShout at 12:51 pm on August 10, 2011

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