The downgrade of the US credit rating should be a lesson to us all, writes Peter Watson.
There is a similarity in how both individuals and countries qualify to borrow money. It is based on the risk of the loan.
For example, if you are living within your means and your income is sufficient to pay your living expenses plus the interest rate cost of a loan, then you will likely receive a loan.
The better your financial situation, the lower the interest rate you will likely be offered. Conversely, if your financial position is less solid you still might get a loan but the interest rate you pay will be higher.
Recently the credit rating of the United States was reduced by Moody’s. This follows a similar move by the two other major credit rating agencies that also reduced the US credit rating in 2023 and 2011.
The reasons for the credit rating downgrade for the US is like any Canadian who is also perceived to be at a higher risk of default due to overspending, too much debt, and the inability to get their financial affairs in order.
Despite the size of the US and its overall strength, their finances have been mismanaged for years. By comparison, Canada is a much smaller country and although I do not think that our federal and provincial governments do a good job managing our finances, it is still better than our neighbour south of the border.
When the US government borrows money, it pays more than one per cent higher interest rate than Canada.
The lesson we can learn from this is how important it is for individuals to properly manage their financial affairs, to protect their credit rating which will dictate future loan interest rates and whether you will be eligible to arrange a loan.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com
