US Credit Downgrade: Potential Impacts on Mortgage Rates and Inflation

Moody’s recent action to lower the U.S.’s credit rating, joining other major agencies, could have noticeable financial consequences for Americans.

The agency lowered the U.S. sovereign credit rating—an evaluation of the nation’s capacity to repay its debts—by one step, from Aaa to Aa1. This is the third instance of a major ratings agency downgrading the U.S. in recent years, following similar moves by S&P in 2011 and Fitch in 2023.

While the downgrade had little immediate impact on the stock market, experts believe it could have future economic repercussions. A country seen as a higher credit risk may face demands for higher interest rates from lenders, which could translate to increased interest rates for consumers and a rise in inflation.

“Increased government debt leads to higher rates, making it more difficult for individuals to build their financial security. This illustrates the connection between policy and personal finances,” explains Preston Cherry, director at the Charles Schwab Center for Personal Financial Planning at the University of Washington–Green Bay.

Here’s a breakdown of the reasons behind the downgrade and its potential effects.

Why did Moody’s decrease the U.S.’s credit rating?

Moody’s cited increasing government debt over the past decade and “interest payment ratios significantly higher than those of similarly rated countries” as the reasons for their decision.

Katie Lingensmith, chief investment strategist at Edelman Financial Engines, says the downgrade reflects the U.S. government’s “unsustainable fiscal path.” The national debt has been growing rapidly since the 1980s, with significant increases during the 2008 Great Recession and the COVID-19 pandemic—during which it increased by about 50%.

The federal debt is currently $36.22 trillion, , compared to nearly $28 trillion in 2019.

Moody’s announcement comes as Republicans consider President Donald Trump’s tax and spending bill, which economic experts caution could further by over $2.5 trillion—although the White House claims it would save the government $1.6 trillion.

How could the downgrade impact Americans?

The U.S. credit rating downgrade suggests that ratings agencies perceive a higher risk of the government defaulting on its debt. Although the U.S. rating remains relatively high, the downgrade may make investors more reluctant to lend to the government and may demand higher interest rates as compensation.

These higher rates could be passed on to consumers. Since mortgage and other lending rates are linked to Treasury bond yields, increased borrowing costs for the U.S. government could lead to higher borrowing costs for individuals.

Treasury bond yields and mortgage rates have both increased in the days following Moody’s downgrade. Thirty-year bond yields rose two basis points to just over 5%, while 10-year yields—which tend to influence mortgage rates—also increased by two basis points to nearly 4.5%. Concurrently, the average interest rate for a 30-year mortgage temporarily exceeded 7%, .

In addition to higher loan interest rates, Lingensmith cautions that the downgrade could also lead to inflation.

Federal Reserve Chair Jerome Powell about the risk of increased inflation in April, warning that Trump’s turbulent tariff policy could cause inflation rates to temporarily rise. Experts agree. “Markets dislike uncertainty. And policy uncertainty, particularly regarding government fiscal disputes, tax policy, and potential shutdowns, amplifies volatility,” says Cherry.

Lingensmith adds that increased debt and higher government borrowing costs can also increase inflation risks.

“If the government struggles to manage its debt and faces increasingly higher interest rates, it could strain the overall economy, hindering growth,” she says. “While higher debt levels don’t automatically trigger inflation, they do increase the risk of inflation through monetization.”