NerdWallet's Smart Money Podcast - What to Do When the U.S. Gets Downgraded and Your Travel Credit Card Stops Paying Off

Episode Date: May 29, 2025

Learn what a U.S. credit downgrade means for your portfolio, plus find out when it might be time to cancel your travel credit card. What does the U.S. credit rating downgrade mean for your investments? Should you cancel your travel credit card if the perks no longer justify the fee? Hosts Sean Pyles and Elizabeth Ayoola discuss the U.S. government’s recent credit downgrade by Moody’s and how it could impact markets, borrowing costs, and long-term economic stability. Joined by NerdWallet news writer Anna Helhoski and investing writer Sam Taube, they break down the downgrade’s broader implications and offer tips on navigating bond yields, safe investment vehicles, and economic uncertainty. Then, Sean and Elizabeth are joined by credit cards Nerd Melissa Lambarena to answer a listener’s question about canceling a high-fee travel credit card. They explore the pros and cons of closing accounts, how to audit whether a card’s perks are still worth the fee, and alternatives like downgrading to a lower-fee card. They also cover how to track credit card value, minimize credit score impact when making changes, and optimize benefits like lounge access, rental car perks, and more. Card benefits, terms and fees can change. For the most up-to-date information about cards mentioned in this episode, read our reviews: United Quest card review: https://www.nerdwallet.com/reviews/credit-cards/united-quest  United Explorer card review: https://www.nerdwallet.com/reviews/credit-cards/united-explorer   NerdWallet offers a Treasury account through a partnership with Atomic: https://www.nerdwallet.com/lp/treasury-account  What is a credit card product change and how does it work? Instead of opening a new account, you could ask to change to a different card. Here's when and how to do so: https://www.nerdwallet.com/article/credit-cards/credit-card-product-change  In their conversation, the Nerds discuss: US credit rating downgrade, Moody’s downgrade 2024, what happens if US defaults, effects of US credit downgrade on investments, treasury bond yields 2024, how to evaluate credit card perks, downgrade travel credit card, how to keep a high credit score without using credit cards, short-term Treasury bills, Treasury accounts vs savings accounts, investing during economic uncertainty, Moody’s credit rating explained, credit rating agencies, U.S. debt ceiling 2024, credit card points strategy, tracking credit card rewards, how to downgrade a credit card, budgeting for credit card annual fees, short-term treasuries vs CDs, best way to manage multiple credit cards, using perks to offset credit card fees, and investing during economic downturns. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

How's your credit, Sean? I know we talk about it all the time, but are you in the 850 club? 850 is not important, as we also say. But yeah, I'm in the neighborhood. What about you? I like what you just did there, Sean, about I'm in the neighborhood.

You didn't give us an exact score. Well, I know I checked my Experian this week, and I'm 10 points away from 800. So you do the math. Okay. Today we're going to talk about someone else's good faith and credit. Good old Uncle Sam. He's been downgraded. We'll hear what that means. Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and

we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Elizabeth Ayola. This episode, we are looking at some reasons why you might want to switch up your credit cards. But first, our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. And speaking of credit, the United States just had its credit downgraded by the ratings

agency Moody's. Our news colleague, Anna Halhowski, is here to explain more. Hey, Anna. Hey, Shawn Elizabeth. Yeah, so Moody's, one of the big credit rating agencies, downgraded the US rating from AAA to AA1. Now, on face value, that sounds pretty far removed from our everyday lives, right? But there are implications for the broader economy that can have ripple effects on our

financial lives, especially when it comes to investing. Before we get to that, can you talk more about the rating system and why it matters? Sure. So the US credit rating evaluates the government's ability to pay its debts. It's set by three major credit rating agencies, Fitch Ratings, S&P Global Ratings, and Moody's Investors Services. Now, Moody's was the last holdout of the three top credit rating agencies

to downgrade the US rating. In 2011, at the tail end of the Great Recession, S&P Global Ratings lowered the US's rating to AA plus from AAA. And in 2023, Fitch issued the same downgrade to AA plus. A lower credit rating from Moody's signals that the US government is at bigger risk of default. And Ana, can you remind us why did the credit rating agencies lower the US's rating in

2011 and 2023? They all have to do with multiple macroeconomic factors, but in all three cases, the debt limit has been a major factor in the decisions. The debt limit is the amount of money the government can borrow in order to meet its legal obligations, as in funding programs that have already been approved by Congress. Right now, the government is in danger of running out of money to meet those obligations. Back in January, the Treasury said it would need to take extraordinary measures so the US could continue to pay for those programs.

And that includes things like Social Security, Medicare, military salaries, tax refunds, and interest on the national debt. If the government doesn't lift the debt ceiling, it could run out of money and then default. A default sounds bad. Am I correct in that assumption? Yeah, bad to say the least. A default could be disastrous for the national and world economies. A default that lasts longer than a few days

could result in a sell-off of U.S. debt, money market funds selling out, suspension of federal benefits, higher interest rates, tanking stock markets, delayed tax refunds. On the individual level, it could result in higher interest rates and tightening credit requirements.

And biggest of all, a default would trigger a recession that could domino to the rest of the world. So you can see why even nearing a default worries credit ratings agencies. The US government has never defaulted beyond a very brief technical glitch in 1979, but it has come close to it. In 2011, negotiations over the debt limit dragged on and it led to the S&P downgrading the U.S. credit rating.

Again in 2023, the government narrowly avoided a fall after months of negotiations and that led to the Fitch downgrade. Is the debt limit issue the reason Moody's downgraded the U.S. credit limit? It's definitely related, but it's not the only reason. Since 1917, the U.S. held a perfect credit rating from Moody's, so the one notch downgrade is a big shift. And that said, the US credit rating is still considered stable, which means it's not dire.

But the Moody's action still demonstrates that confidence in the US economy's trajectory has diminished. In its explanation, Moody's laid out its concerns, including an increase in debt over the last decade and the growing interest payments eating up government revenue. Now over to the debt ceiling. The House GOP's recently passed budget includes a $4 trillion debt ceiling increase.

If approved by the Senate and signed by the President, that could very temporarily stave off another near crisis for about a year and a half, according to the Center on Budget and Policy Priorities. That's because the budget also contains policies that would worsen the deficit, including increased spending for things like defense and lower revenue due to big tax cuts. Moody's specifically flagged expectations for the next 10 years that show flat growth and higher deficits. I asked our resident economist Elizabeth Renter her views on the downgrade, and she said that to Moody's, quote, the situation has reached a tipping point where Moody's believes U.S. economic strengths

no longer outweigh its weaknesses. So to your original question, debt ceiling negotiations are related to the Moody's decision, but it's looking at the nation's broader financial stability, including overall debt and interest. Anna, at the top, you mentioned some potential impacts on investing. Tell us about that. I did, but I'm no investing expert, so I'm bringing in Nerdball investing writer Sam

Taub to talk more about that. Hey, Sam, thanks for helping out. Happy to be here. Sam, what are the most immediate investment implications of the Moody's downgrade? I'm assuming the biggest impact was on treasury bonds. Yeah, the most immediate effect was definitely on the treasury bond market where yields really spiked last week due to the downgrade.

To explain why that happened, let's back up for a second. A treasury bond has a face value, which is often $1,000, and the bond holder will get that face value plus a fixed amount of interest if they hold the bond to maturity. But they often buy the bond at a discount to that face value. What we call yield is really just the difference between the purchase price and the face value plus interest. So when we say that treasury yields are going up, what we really mean is that the purchase price of treasuries is going down, either because people are selling them or because they're demanding

a steep discount or a high interest rate at government auctions. So, last Wednesday, the government auctioned off $16 billion worth of new 20-year treasury bonds. It was the first auction of this type since the Moody's downgrade, and it went really badly. Investors demanded much higher yields than expected to buy these new bonds because they were freaked out about this downgrade. And that pushed the 20-year yield above 5%, which is not necessarily a doomsday omen, but it's a psychologically significant number. LESLIE KENDRICK And what about other investments like foreign bonds or stocks? How are they responding to this downgrade?

JARED BOWEN Well, the U.S. bond sell-off did spread to other government bonds from other countries. German and Japanese bonds both saw their prices fall and their yields spike as well. The stock market did falter slightly as well, although that wasn't as dramatic as some of the tariff-related stock market crashes we saw earlier this year. The S&P 500 dipped by about 2.7% over the course of last week. What does the downgrade mean for the government or companies' borrowing costs, and how might that affect investors down the line? I think that a good way to explain the long-term effects

is by looking at the government. So in any given week, the US finishes paying off a bunch of treasuries, but it also issues a bunch of new treasuries. The national debt is this rolling, continuous thing whose interest rate changes over time as yields go up or down. When yields go up as they have in recent weeks,

that effectively means the U S government's interest expense goes up. When bondholders demand a higher yield, they're basically lending the government less money per bond, but the government still has to pay them back the face value of the bond plus interest no matter what. So that increases the effective interest rate the government is paying on its bonds. It increases the cost of servicing the national debt. To put this in perspective, bond interest payments already make up about 14% of total

government expenditures so far this year. That's more than we spend on Medicaid or Medicare or even defense. It's actually the second largest line item right now after social security. If we can't get that number down or it goes up, it could really limit the government's ability to spend money or return it to taxpayers in the future.

And that's bad news no matter what your politics are or what you want the government to taxpayers in the future. And that's bad news, no matter what your politics are or what you want the government to do with your money. It makes left-wing policy ideas like a universal healthcare program less affordable, but it also makes right-wing policy ideas like tax cuts less affordable. And how should long-term investors think about risk after a downgrade?

Are there still safe yield opportunities? Definitely, and I think it's important to not catastrophize about what this downgrade means. Treasury bonds are still a very, very safe investment, and the U.S. still has a very high credit rating even after this downgrade. It doesn't mean a default is likely by any means, it just bumps up the probability from almost impossible to really, really unlikely.

Moody's provided a lot of reassurance on this point in the announcement about the downgrade. They basically said that as long as things like checks and balances and the rule of law still exist in the US, we have the capacity to get our house in order financially. So this isn't good, but it's not the end of the world. All right, Sam, do you have any other advice to investors who might be feeling a little nervous right now?

Here's a glass half full perspective on all this. Treasury bonds are still very very safe investments and this downgrade means that they pay a little more than they did before. We've talked about long dated treasuries like the 20-year bond but shorter term treasuries like the one-year bill also have elevated yields as a result of this downgrade. In some cases they're actually paying more than one-year certificates of deposit. Plus, the interest on treasuries is exempt from state and local taxes.

So, if you're looking for a safe savings vehicle to put your money in and earn a little interest, short-term treasuries might be worth considering, potentially as an alternative to CDs. Nowadays, some financial institutions also offer something called a treasury account, which is kind of like a savings account, but it automatically invests in short-term treasuries for you. It basically gives you the ease of use of a savings account, but the high yield and the tax advantages of investing in treasury bills. NerdWallet actually offers a treasury account through a partnership with Atomic.

All right, thanks for explaining all that, Sam. Of course, thanks for having me on. And thank you, Ana. Of course. Up next, we answer listeners' question about switching up their credit cards. But before we get into that, a reminder to send us your money questions.

Do you wanna know the smartest way to budget for your summer vacation, or are you in the market for a new credit money questions. Do you want to know the smartest way to budget for your summer vacation? Or are you in the market for a new credit card but aren't sure how to find the one that's best for you? Leave us a voicemail or text us on the NerdWallet.com at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. In a moment, this episode's money question.

Stay with us. We're back and we are answering your money questions to help you make smarter financial decisions. This episode's question comes from Keith and he sent us an email. Here it is. I have a question about the dreaded credit cards. We have a United Quest Visa I acquired

because I was traveling via air for work on a regular basis. So the $350 annual fee and a subscription to the United Club made sense, especially since I could bring my wife when we travel together. However, recently, United changed its policy for the United Club membership and increased their fees to $750 per individual and $1,450 for an individual with access for two guests, making it so expensive I'm no longer interested. We love having the available

credit of $16,000 but would pay $100 a year for it. Our 2025 goal is to get off of credit cards other than using one for monthly bills. Should we cancel? I am thinking it's a good thing to have the available credit. We have five now empty cards. We will be 100% no debt this fall minus the mortgage.

I have y'all to thank in part for that, by the way. Mahalo nui loa. Thanks for your thoughts. To help us answer this listener's money question, we have credit card nerd Melissa Lamborina. Welcome back to the show, Melissa. Thank you for having me. Before we get started, just a note that we're going to talk about some credit cards in this episode. So some may be nerd wallet partners, but that does not influence our opinions at all. Also, the benefits, terms, and fees mentioned were accurate at the time of posting, but things could change in the future. Some offers may have expired by the time you're listening, but for the latest details, follow the links in the episode description. Alright, so moving along, the listener wants to know whether it makes sense to cancel their

travel credit card, especially with the increased annual fee. So Melissa, can you talk us through how to decide whether the annual fee is worth it, first of all? It's important to understand that if you are trying to chase those points or you could potentially end up with those multiple credit cards, it's not a good place to be unless you have an organized system to keep track of those annual fees. Because what you're going to want to do is make sure that you have a list of those perks

and incentives to know that you are making the most out of them to offset that annual cost. A credit card's annual fee can only be worth it if you can make use of those perks. Otherwise you're better off with a no annual fee card. Melissa, I'm asking for myself too. So I currently have two travel credit cards with pretty high annual fees. I probably have them both for under two years and I just got hit with an annual fee and I am trying to figure out how to go back and make sure that basically the fee is worth it.

So what are some practical ways that people can do that? You can make a list of the ongoing perks and incentives that the card offers. You want to look at what that particular credit card offers. For instance, if it's a travel credit card, are there credits that it offers? Are there different benefits like free checked bags or perhaps an anniversary bonus or other types of incentives that can offset the cost of the annual fee? Now, just because they offer the perks to offset the annual fee doesn't necessarily mean that you'll make the most of them. So you want to be realistic with yourself and know whether you'll actually use those perks. Otherwise, you're going to

be paying out of pocket to make up the cost of that annual fee. And that's what you want to avoid. So I'm thinking maybe a practical way people can do that is I'm an Excel sheet girl. So maybe noting down somewhere or kind of tracking what you're using, or maybe even just doing a recap at the end of the year to see How much of the benefits you've actually used so do you think that's a way to go about it a spreadsheet is an excellent way To be able to keep track of everything But if that's not your style a simple list going the old-school way and writing things down Will be helpful. In the listener's case, it sounds like they are no longer getting as much value from the

card to justify the annual fee. It's unclear if they factored in the value that the card offers for checked bags though. If they do use that perk, the card can almost pay for itself even if they don't end up using some of the other card benefits. From what they've shared though, it sounds like they still have some options. They can potentially extract value from a general purpose travel credit card or they can also consider switching their credit card to one that has a lower annual fee with the same issuer. For instance, they say they have the United Quest card so they could ask the issuer if

they can switch to the United Explorer card, which has a lower annual fee, and it also offers two annual United Club passes. And I mention this because it sounds like lounge access is important to them. Well, I actually didn't know, so thanks for that, that you could downgrade a travel credit card. So that's good to know that that's an option. Some people take out several credit cards for the perks, be it travel rewards or points. And I know personally that it's easy to lose track of all the annual fees and also end

up spending across multiple cards. So how should people approach taking out cards for perks? And when is it time to reevaluate whether it's still a smart financial move? To answer the first part of your question, how people should approach taking out cards for perks, you want to make sure that you don't take out too many applications at once for a credit card because it can temporarily cause your credit score to drop. So you want to apply for one credit card only at a time. You want to consider whether your credit card is still adding enough value to your life. It's important to be

periodically auditing your credit card to determine if they're still right for you. Our lives are constantly evolving and so after any major big changes, life events, you want to check in to see if your credit cards are still giving you as much value. And when you're looking for a new credit card, make sure that it's one that aligns with your lifestyle. So if the bulk of your budget goes heavily to groceries, then you want to look for one that will reward that generously. Let's move on to the second part of the question now.

So the listener asked whether they should cancel their card. Can you talk us through what the pros and cons of canceling a credit card are? Typically, you want to avoid closing a credit card unless there's a good reason for it, because it can have a negative impact on your credit score. Some possible reasons for closing one may be because they have higher annual fees, or they no longer offer as much value as they once did, or perhaps if they're causing you to spend impulsively.

When you close a credit card, your credit utilization can rise. That's the amount of available credit you have, and it's a key factor that impacts credit scores. A closed account could also impact the length of your credit history depending on different factors. So if you must close a credit card, your credit scores can eventually bounce back over time as you manage credit responsibly. But it's important to understand that these things can happen. Also there is a lesser known alternative if you want to keep your credit score intact and this is the product change. A lot of people aren't aware that they might be able to switch their credit card with the same issuer to one that offers more value or perhaps offers a lower annual fee.

And what would the appeal of that be? The appeal is that you can typically keep your same card number and you don't have to apply for a new credit card and initiate that hard pull that typically causes your credit scores to temporarily drop. We'll include a link in today's episode description to an article we wrote that dives deeper into what a credit card product change entails and how it works. And whether you're upgrading, downgrading, or closing a credit card altogether, just be sure to make use of those rewards before you take any actions or at least understand what can happen to

them if you do end up taking any of those actions. I love that nerdy advice, and I actually yesterday was scrolling through my own travel credit card benefits, and I saw that I had discounts and also more points when I use my card for rental cars. So I will be using that during the summer in an upcoming trip. There you go.

It is important to be reading your cards benefits because they are constantly changing as well. Credit card debt is becoming increasingly expensive. There's been a rise in delinquency on credit card debt in recent years. Keith is choosing to opt out of them altogether or only have a few credit cards. Melissa, what implications could not having credit cards have on one's credit score? Unfortunately, this is something that people are navigating, but it's important to understand that there are implications for not having credit cards at all. Credit cards offer one of the easiest ways to build credit. And if you don't have credit cards or any

form of credit to establish a credit history, it can make it more difficult to get a loan later on, if you should date one. So unless you're a supersaver who likely won't need credit later on to buy a car or a home, then it's worth keeping your credit options open. Also know that you might need to rely on good credit to be able to rent an apartment or get more affordable utilities or insurance in some instances. That said though, it's important to acknowledge that credit cards aren't always a good fit for everyone.

If they're causing you to overspend or spend impulsively, or they're not helping you along with your financial goals or they're hindering them in any way, then it's worth considering switching to a different payment method. I know with my credit card, I have maybe like two credit cards that are idle, so I don't use them. So is that an option for people if they don't want to cancel their card? Can you just leave it there idle? It's an option, but you need to know what can happen if you go that route. Inactive credit cards may be subject to cancellation.

If you don't keep a credit card open and active, it's not uncommon for issuers to close those cards due to inactivity. And that can have a similar impact to your credit score as if you were to close it yourself. So what you can do with those no annual fee cards that you don't have as much use for anymore is to keep them open with small recurring purchases

that you can set up automatic payments for. Think like a gym membership or a streaming service subscription, for instance. Melissa, do you have anything else that you think the listener or anyone else who is considering closing their travel credit card should think about or how to basically maximize their points and their benefits? Just make sure that you are keeping track of everything, especially if you have more than one credit card.

You want to be organized and keep it manageable. And if for any reason you find that it's getting a little bit hard to handle, then it's time to reconsider your strategy and maybe consider a product change. Absolutely, and I'm going to add in there consider your strategy and maybe consider a product change. Absolutely. And I'm going to add in there that it may be a good idea to also budget for the annual fee and set a reminder wherever you set your reminders, be that in your calendar or anywhere else for when the annual fee is coming up.

Budgeting for it can ensure that it doesn't throw your budget out of whack when you're suddenly hit with an annual fee that you weren't expecting. That's right. That's a great tip because some of those annual fees are hefty, several hundreds of dollars. So you want to make sure that you're not caught by surprise when that annual fee hits. Melissa Lamberina, thanks for coming on

and answering these questions. Or should I say, mahalo nui loa. It's been a pleasure to be here. And that's all we have for this episode. Remember, listener, that we are here to answer your money questions. So turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. And if you're listening on Spotify, leave us a comment

to let us know what you thought of this particular episode. Join us next time to hear Sean ask a nerd questions about managing rental properties. Follow Smart Money on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. And here's our brief disclaimer. We are not your financial or investment advisors.

This nerdy information is provided for general educational and entertainment purposes, and it may not apply to your specific circumstances. This episode was produced by Tess Viglin and Anna Helhoski. Nick Charissimi mixed our audio. And a big thank you to NerdWallet's editors for all their help. And with that said, until next time,

turn to the nerds. ["Nerds"]