What's the Difference Between the U.S. and a Consumer Defaulting on Debt?
Written by: Kristy Welsh
PHOENIX, AZ--(Marketwire - 07/26/2011) With the US debt-ceiling limit a heated topic of debate, many people wonder what would happen if we ran out of money to pay our bills. Do the same things happen to the U.S. Treasury as individual people? Kristy Welsh says there are some parallels. "One thing sure to happen in the case of the U.S. and an individual is both of the respective party's credit rating would be lowered."
In the case of the U.S., Moody's has warned that they would immediately decrease the credit rating of the U.S. Treasury Bonds from AAA to AA. And that's not all. According to a recent article in BusinessWeek, Moody's predicts they would also immediately reduce the level of 7,000 municipal bonds in the country should the U.S. Treasury rating be downgraded.
In the case of the individual, if a consumer stops paying on his or her bills, the late payments would reflect on their credit report, immediately lowering credit scores. For example, a late pay on a mortgage can lower a credit report by as much as 100 points, according to FICO. A 30 day late mortgage payment with 680 credit score can be reduced to 600, a 720 score can be reduced to 630 points, a 780 credit score can be reduced to 680.
Even just being deep in debt affects your credit score. The U.S. is reaching its credit limit, so to speak. What would happen if an individual reaches their debt ceiling? In the consumers' case, their credit score is negatively affected. FICO says a maxed out credit card can lower your score up to 45 points. FICO recommends keeping your credit usage to 33 percent of your maximum limits.
Founded in 1997, CreditInfocenter.com is a free one-stop destination for consumers looking for advice and tips on repairing bad credit, and rebuilding good credit. It advocates the self-help approach to credit and debt management. Editor and founder of Creditinfocenter.com, Kristy Welsh, is also the author of several books on personal finance, including Good Credit Is Sexy, a tongue-in-cheek guide to managing your credit.