US credit rating outlook lowered to "negative" by Moody's — here's why consumers should be worried

Moody's, a leading risk assessment agency, has lowered the United States government's credit ratings outlook from "stable" to "negative," citing political polarization in Congress.

A country's credit rating is similar to an individual's credit score — it evaluates how likely an agency believes the government is able to pay back its debt obligations. A negative assessment can impact stock prices and interest rates on consumer financial products.

Moody's still assigns the U.S. its highest AAA credit rating, though it's the only one of the three main rating agencies to do so. In August, Fitch Rating downgraded the government's long-term credit rating from AAA to AA+. Standard & Poor's lowered its score to AA+ back in 2011, after an earlier debt-ceiling crisis.

If Moody's changes the U.S.'s actual credit rating, rather than just its outlook, the government may be unable to borrow as much money, or would have to accept a less desirable interest rate. That could affect the ability to pay government workers and provide critical services like Social Security.

CNBC Select explains what caused this latest adjustment and how it could affect consumers.

Moody's attributed its shift in outlook to declining fiscal stability, as exemplified by the government risking a default on its debt this summer, after Congress failed to raise the debt ceiling.

There was also the threat of a government shutdown, which President Joe Biden narrowly avoided by signing a 45-day funding bill on Oct. 1.

That same month, Republican Speaker of the House Kevin McCarthy was ousted via a no-confidence vote, the first in U.S. history. That it took weeks to elect his replacement also factored into Moody's lowered outlook, the agency said.

On Monday, Republican Rep. Mike Johnson of Louisiana, who eventually took the Speaker role, introduced a plan to keep the government running into the new year. While it passed the House 336 to 95, the majority of opposition came from fellow Republicans, underscoring the political instability Moody's called out.

The measure was approved by the Senate Wednesday night and was sent to President Biden's desk for signing.

Moody's official credit rating for the U.S. has not shifted away from AAA, but it is in jeopardy. And even the threat of a downgrade can have an impact on the stock market and interest rates. Three days after Standard & Poor's credit rating change in 2011, the S&P 500 index dropped almost 7%. After Fitch adjusted its grade in August, the Nasdaq Composite fell 5.2% and the Dow Jones Industrial Average declined 3%.

The other effect everyday Americans could feel is higher interest rates for various types of loans, including mortgages and credit cards. Government debt assets that can be bought as investments, like Treasury bills, notes and bonds, have historically been considered among the safest investments possible. A compromised credit rating could make them seem riskier and cause demand to decline.

Traditionally, banks have used the 10-year U.S. Treasury yield as a benchmark for mortgages and other interest rates. So if demand decreases, those rates could rise.

If you're considering a personal loan, now could be a good time to apply, given the potential for Moody's to fully downgrade the US's credit rating — as well as the Federal Reserve's leaving the door open to raising rates again in December.

CNBC Select rates LightStream Personal Loan as the best overall personal loan provider, with low APRs and flexible terms that benefit borrowers with average-to-high credit scores. LightStream offers loans of up to $100,000 for a variety of goals, from buying a car to making home improvements.

The APR is fixed, which means your payments stay the same regardless of what rates do in response to external forces like Moody's or the Fed.

Moody's isn't the first firm to give the U.S.'s credit rating a black mark, but it's the only one that still ranks it AAA. With a potential downgrade on the horizon, locking in a lower APR loan now could be the right move.

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