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You hear a lot about the credit scores of individual consumers and how that affects their borrowing power. But what you might not realize is that governments have credit ratings, too.

Similar to those of individuals, government’s credit ratings indicate how likely they are to default on their debt — and recently, the rating of the U.S. took a dip. In mid-May, the credit rating agency Moody’s Ratings downgraded the U.S. credit rating by one notch, “from Aaa, the highest rating, to Aa1,” said NerdWallet. It was not the first agency to do so, either. “The downgrade from Moody’s means that each of the three major credit rating agencies no longer gives the United States its best rating,” said The New York Times.

Here is a closer look at what that means — and why it matters.

What are credit ratings?

Just like consumer credit scores, the credit ratings of countries assess their general creditworthiness, or how likely they are to meet their debt obligations.

To make this determination, these ratings “measure the overall economic conditions of a country, including the volume of foreign, public and private investment, capital market transparency and foreign currency reserves,” said Investopedia. Additionally, ratings “assess conditions such as overall political stability and the level of economic stability a country will maintain during a political transition.”

There are a number of different credit rating agencies that assign credit ratings to countries, with the big three being Moody’s, S&P Global and Fitch Ratings.

What causes credit rating downgrades?

A credit rating downgrade “means that government debt, including bonds and securities, is viewed as becoming riskier,” said NerdWallet. There are a number of factors that can lead to that shift in perception.

The recent Moody’s downgrade, for instance, was a reflection of “concerns about how the nation has managed its finances over the past decade and its expectation that government debt and interest rates will continue to grow,” said NerdWallet. Another element, per Moody’s, was “decades of gridlock and dysfunction in the nation’s capital,” said The New York Times.

Meanwhile, a prior rating downgrade in 2023 by Fitch was attributed to “expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance” in comparison to comparable nations, said Investopedia.

How do credit ratings affect consumers?

Shortly after Moody’s downgrade, “investors sold off U.S. debt,” in a “trend” that “threatens to drive up interest rates for everything from credit cards to mortgages, while pressing the brakes on economic growth,” said ABC News. Alongside making borrowing more expensive, it is possible “businesses also face higher borrowing costs,” which could affect hiring and other decisions.

Still, downgrades have historically “proved largely symbolic,” said the Times. While the downgrade signals a slip, the “American government’s debt remains the bedrock of the global financial system.”