Here’s what’s behind the U.S. losing its top credit rating, and why it matters

The impacts of a slip in the U.S. credit rating announced last week were starting to appear across financial and securities markets Monday as concerns over a growing national debt balance pushed the country out of the top credit tier.

Moody’s Ratings downgraded its assessment of the United States’ sovereign credit worthiness on Friday in a move the agency said was driven by rising national debt and no clear path currently on the horizon to address the issue.

The decision, which ratcheted the country’s credit rating down one notch to Aa1 from Aaa, makes Moody’s the last of the big three rating agencies to put the U.S. at the second tier of its rating scale. Standard & Poor’s downgraded the U.S. to AA+ from AAA in August 2011, and Fitch Ratings also cut the U.S. rating to AA+ from AAA, in August 2023.

In its announcement, Moody’s said the adjustment was based on the level of U.S. debt as compared to other countries.

“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s wrote in a Friday report.

Moody’s noted both U.S. fiscal history and current policy direction contributed to pushing the country’s credit rating down.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s wrote. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat.

“In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The U.S.’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”

What happened after the U.S. credit downgrade?

Major U.S. stock indexes were mostly lower early Monday and long-term yields on U.S. Treasury bonds moved up sharply. Yields on 30-year Treasury notes moved past 5%, the highest rate since late 2023. The yield on 10-year bonds climbed 6 basis points to reach 4.5%. And the 2-year Treasury yield moved up to 3.99%.

Higher treasury bond yields can push up interest rates on consumer debt, including mortgages, automobile loans and credit cards.

The current average credit card interest rate across the U.S. is 20.12%, according to the latest data from Bankrate, down from an all-time high of 20.79% last August. As of last week, the average interest rate for a 30-year fixed rate mortgage was 6.81%, according to Freddie Mac.

Economists note changes in the country’s credit rating have a direct impact on the interest rates consumers pay on typical household debt.

“When our credit rating goes down, the expectation is that the cost of borrowing will increase,” said Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C., per a report from CNBC.

That’s because when “a country represents a bigger credit risk, the creditors will demand to be compensated with higher interest rates,” Johnson said.

A Monday report from the Wall Street Journal notes that investor worries about America’s debt trajectory took another hit on Sunday after the House Budget Committee approved President Donald Trump’s tax-and-spending bill late Sunday, a milestone for a proposal that is projected to add trillions of dollars to the deficit.

The bill has several more obstacles to clear in the House and Senate.

“One thing stands out though, and that is that at this stage there are no signs of any serious deficit restraint,” said Deutsche Bank strategist Jim Reid.