As investors got a bit of a reprieve today – the stock market is up roughly 150 points – consumers can take a breath and begin to survey the damage to their financial health that accumulated during the past few days.
One area that is getting short shrift – but shouldn’t – is the impact the Standard & Poor’s debt downgrade may have on credit card rates.
First, some background. The downgrade on U.S. Treasury bonds that was issued by ratings agency Standard & Poor's – from AAA to AA+ – was widely viewed as a wake-up call to the U.S government and its “drunken sailor” approach to spending (though that might actually be an insult to drunken sailors).
While the Fed says it will keep rates near zero, many economists expect major consumer interest rate categories to eventually rise because of the downgrade, including things like mortgage, auto and student rate loans.
It’s no big secret why. Any consumer with a low credit rating knows that he or she is a bigger credit risk to lenders, and thus must pay higher interest rates for creditors to accept that risk and loan the consumer money.
It’s the same thing with Standard & Poor’s and the U.S. government. A lower credit rating means that global creditors face a higher risk of default when lending money to Uncle Sam. To borrow money – usually through the sale of U.S. Treasuries in the bond market – the U.S. government will have to offer higher rates of return to investors.
While the benchmark 10-year Treasury saw lower rates in Monday trading, Tuesday’s early trading sessions signaled the opposite. We saw those higher interest rates in the morning trading session: At 10:45 a.m., the 10-year note’s yield stood at 2.38%, up 0.043% from Monday. After the Fed announcement though, the rate plunged to 2.18% by 3:20 p.m., down 0.15% from Monday.