Have you ever looked at all three of your credit scores? Most likely all three are slightly different.
That simply means that three different companies have come to slightly different conclusions, based on the data they have, as to how likely you are to repay your debt. We're all financially beholden to these gods of credit scores.
Ironically, the United States of America also has to answer to the credit gods - Standard & Poor's, Moody's, and Fitch Ratings bond (debt securities) credit agencies. One of those credit gods just dropped the hammer last Friday.
Is there an Opportunity in a US Credit Downgrade?
Okay, surely I'm starting to bore you with the financial techno-babble so I'll put the meat of the matter up front: There's a very short-term opportunity in mortgage rates. While everyone else is panicking about their stock portfolios and 401(k)s you can soften your pain by potentially recovering large amounts of cash every month with a lower mortgage payment or snatching up a home worth far more than the sale price, in the most affordable housing market in recent history.
However, this is window of opportunity is predicted to close fast. Mortgage rates have dropped due to a significant shock to financial markets, but economists are predicting the event to trigger a steady rise in mortgages rates. Now that you have the important stuff up front, let's dig into the mayhem to understand what's happening. It'll help you make better personal financial decisions in the short-term.
What Caused the US Credit Downgrade?
Dave Ramsey, a personal finance commentator, has put together one of the best analogies on what got us here and why S&P is nervous about the United States' credit report. "What would happen if John Q. Public and his wife called my show with these kinds of numbers? Here's how their financial situation would stack up [to the US debt situation]:
"If their household income was $55,000 per year, they'd actually be spending $96,500 - $41,500 more than they made! That means they're spending 175% of their annual income! So, in 2011 they'd add $41,500 of debt to their current credit card debt of $366,000!" Ramsey follows his analogy with some simple advice: "Stop overspending!"
That's exactly what S&P was urging on the US government. They were closely monitoring the debt ceiling and any potential default, but like credit bureaus for personal credit scores - they're looking at the likelihood to default.
S&P and their credit predicting models, algorithms, and mathematicians think that the US needs to cut $4 billion in spending to lower that likelihood. Congress increased our credit limit and said they plan on finding $2.1 billion to cut.
Is it clearer why S&P was alarmed enough to issue a history-making credit downgrade?
Why Did Mortgage Rates Go Down?
Everything is going in the wrong direction. Why then are mortgage rates dropping even lower than already historical lows? More importantly, will they last?
Mortgage rates are often indirectly moved by yields, or interest rates, on US Treasury bonds. Interestingly enough, despite the downgrade by S&P, investors are looking at the damage in the stock market, the uncertainty in global markets and flocking to US Treasury bonds (debt).
Side note: lower your stress and simply throw your next 401(k) statement in the trash without opening it.
This is the value of having a spotless track record paying your bills. That's why credit bureaus for individual credit scores weigh that factor so high.
Having said that, this fight or flight response that is getting tons of investors to run to US debt bonds is likely to be very temporary. Investors need more return on their investment than these crazy low interest rates yield and US politicians are unlikely (in an election year) to show the decisive leadership necessary to quickly solve our big debt problem. The result?
Investors will flow out in the same massive numbers - raising interest rates just as dramatically - because they need to solve the problem of earning money for their clients faster than the US government needs to solve their debt problem.
What Should You Be Doing?
I return to the same premise I started with…
When the financial markets get crazy, opportunities open up for those smart enough and calm enough to look for opportunities. Here are two opportunities I am suggesting:
- If you have a mortgage or are considering buying a house, contact a mortgage expert today and discuss your opportunities.
- Whether you have good credit or bad credit, learn from the woes of the US government - take it seriously, protect it with careful monitoring, and improve it wherever possible.
To find out if you can save money on your mortgage and to learn how to improve your credit, visit Quizzle.com.