Well, if you are one of the lucky ones who’s managed to avoid the news this past weekend, let me be the first to inform you: the United States has had its credit rating lowered, at least by one of the three agencies that maintain such ratings. It’s been all over the news (financial and otherwise) the past several days, and will likely have quite a bit of impact over national finances in the future.
To help you get your head around just what this means, I figured that it would be as good a subject as any to cover in this week’s Mixed Bag Monday. While we’re at it, we’ll discuss YOUR credit rating, so you can do your best to avoid following in the United State’s footsteps and having your credit rating decreased. Let’s get started with the obvious question:
Q: What Happened to Downgrade the U.S. Debt?
A: Remember the debt ceiling debate, and the amount of fighting, arguing, and rancorous insults that resulted? Well, even though an agreement was eventually reached, it wasn’t quite enough for Standard & Poors. It didn’t address programs like Social Security and Medicare (which will be the major drivers of U.S. debt in the not that distant future) and also didn’t include any new revenue (that is, more taxes, which Republicans were dead set against raising). Add in John Chambers’ notes that the plan didn’t take steps to boost economic growth, and that’s why S&P decided to bump the credit rating down.
Q: Just What Does This Downgrade Mean?
A: Well, that’s a tough one. There isn’t likely to be huge changes for most individual consumers, at least in the near term: the U.S. is still considered one of the safest places to invest in the world, and it’s unlikely that investors will flee to other investments in the near future. That said, there are going to be ripples that could affect everything from the skittishness of the stock market to the interest you pay on loans. The prime rate, which determines how much you pay in interest on credit cards, could increase, meaning you have to pay more.
Q: What Should I Do Now?
A: Short version: Not too much. Assuming that you have a diverse, well-balanced portfolio, there’s not too much you need to do to ride the wave of skittishness that is likely to envelope the markets for the next several weeks. It would be a good idea to look over your portfolio, ensuring that you are diversified, so that this turbulence doesn’t throw your investment plans off too much. Bear in mind that the U.S., while its credit rating has been lowered, is still AA+ (and AAA, according to the other two rating agencies); it’s a long way from ‘junk’ status.
Q: Do I, like the U.S., Have a Credit Rating?
A: Yes, yes you do have a credit rating. Much like the U.S. and other credit issuers are rated by three agencies (Standards & Poors, Fitch, and Moodys), you have three different scores (from the credit bureaus Transunion, Experian, and Equifax). These credit scores (often called FICO scores, from the Fair Isaac and Company that created the software used) should be roughly the same, but can vary, as different companies report your transactions to different credit bureaus. Which score(s) a would-be creditor uses will vary as well, although for major loans (like a home mortgage), all three scores are used.
Q: What Determines My Credit Score?
A: The Fair Isaac tends to be very secretive, not giving out the exact formula. But, plenty is known about what goes into the score. Some things you need to do to keep your credit score high (and the interest you pay on your credit low): pay your debts on time, keep your total debt to a small portion of your available credit, don’t open up too much new credit (and keep your oldest accounts open), and have experience with multiple types of credit. All these actions will help to improve your credit score.
Q: How Do I Learn My Credit Score?
A: If you want to learn your credit scores, you’ll have to pay the appropriate rating agency to get the score they have for you. You are entitled to a free copy of your credit REPORT each year, which lists your credit transactions that go into making your credit score, from annualcreditreport.com. (NOT ‘FreeCreditReport.com’, regardless of their catchy jingles; that site will charge you after a brief ‘trial’ period.) While you should get your credit report to ensure that everything included in it is correct, you’ll need to pay (typically around $15 per agency) to get the credit scores.
If you don’t take on too much debt, make sure to pay the amount you owe on your debts, and vary the types of debt you take on, you should be able to develop a pretty solid credit score without too much trouble. Then, maybe you can pass some tips onto the U.S. government…