Home / Credit News / Cost of credit downgrade may be passed on to borrowers

Some of the largest banks in the U.S. received bad news at the end of last week in the form of reduced credit ratings, and it may be consumers who end up facing higher costs for various accounts as a result.

Moody's Investors Service recently downgraded the credit ratings for major financial institutions such as JPMorgan Chase, Morgan Stanley and Bank of America, which prompted many consumers to wonder about the security of their current accounts with the banks, according to a report from The Associated Press. While they have little to worry about with regard to their checking, savings and current credit cards, more problems may arise for them in the future as a result of these downgrades.

"It is normal that the first thing that people worry about is whether their money is safe," Jim Nadler, chief operating officer at Kroll Bond Ratings Agency, told the news agency. "But the real costs may be hidden."

Those additional costs consumers may face will likely come in two forms, the report said. For one thing, the fees that many consumers have seen increase since the end of the recession, stemming from increased regulation on the financial industry, will likely rise again, and new ones could pop up as well. But beyond that, it will likely lead to an increase in the interest rates lenders charge consumers for a number of different types of credit, including credit cards, auto financing and mortgages.

That is, consumers will face these increased costs if they are able to qualify for new lines of credit at all, the report said. The credit downgrade will likely prompt those affected by it to once again begin constricting their borrowing qualifications to ensure that subprime consumers have less access to credit, which would therefore expose these institutions to less risk overall, and a healthier portfolio of accounts. This may be problematic for the economy at large because, already, experts say that lenders are being too tight with their efforts to grant consumers mortgages, and that may be holding back the housing market's ability to make a recovery in earnest.

However, lenders have been expanding their credit card issuing considerably in the last several months, and restricted efforts now might lead to fewer instances of delinquency and default in the next several months.