A credit downgrade occurs when a credit rating agency lowers a municipality's credit rating, indicating increased risk that the municipality may have difficulty repaying debt. Downgrades result from deteriorating finances, governance concerns, economic problems, or other factors raising repayment risk. Lower credit ratings increase borrowing costs because lenders demand higher interest rates to compensate for greater risk. Significant downgrades can substantially increase interest expenses, affecting municipal budgets. Downgrades also signal financial stress that may concern residents and investors. Municipalities work to maintain or improve credit ratings through sound financial management, maintaining reserves, controlling debt, and demonstrating stable governance.