Corporate Finance

finance a la shmoop what our credit ratings and how are they interpreted?

well maybe you've heard your parents groan about all of their accumulated

debt or at least you did in high school and you know how it's sinking them. your [kid asks for dinner]

mom put the new fridge and dishwasher on her Amex and now it's all maxed out. your

dad meanwhile invested in a new set of golf clubs and put his flight to Myrtle

Beach on his visa, and now well your dad might have a nice tan and maybe he's

shaved a few strokes off his game, but you and your sister are eating baked

beans out of the can and taking time to 30-second showers to cut down on you

know gas expenses, so credits evil right? you should only pay for something if

you've got the cash right now in your pocket to pay for it right? well no not

right it's true making purchases on credit and be abused and often is but

building credit ie showing the rest of the world that you can borrow money and

then pay off your purchases responsibly whether you're an individual or a

corporation is absolutely essential in making your way through this vast [computer game labyrinth pictured]

complicated world of ours and establishing your own credit rating. so

what really is a credit rating ?well it's a determination of your ability to pay

your debts fully and in a timely manner. all right well there are three major

credit rating agencies who specialize in making these types of evaluations for

the big boys ie large public corporations who borrow money all the

time. the agencies well they're the ones with catchy names like Moody's Standard

& Poor's and Fitch. note that these three are typically used to determine the

reliability of businesses to pay off their debts.

don't confuse credit rating agencies with credit reporting agencies, of which

the major players are Equifax Experian and TransUnion. those guys publish credit

reports assigning credit scores to individuals. so they determine whether

you're able to get that Prius you've had your eye on or whether you can get [orange Prius pictured]

the keys to a nice new condo or whether you can finally upgrade from your

antique typewriter to Mac. but credit ratings indicate whether

someone might want to trust this or that company to make good on their debts.

check out this table which gives you the rundown of Moody's and SNP ratings right

there. don't worry about Fitch for now they're low man on the totem pole .all

right for Moody's anything rated be a three or better is considered investment

grade. for S&P well it's anything triple b-minus or higher. so both agencies would [credit rating chart pictured]

recommend investing in a company's debt at the top of their class, but for any

failing below this line well they've kind of slapped a junk ish bond label on

it. in other words you know and take your chances. the better the grade the better

a company is done in keeping their books checking their boxes crossing their T's

and dotting your I's and likely it means that they're a low risk. and so

they get cheap interest rate. though the odds are paying back their debts are

high when the risk is low and they're encouraged borrow more money until

they're not a good credit risk. well the ones at the bottom of the barrel are

probably sending weekly emails soliciting funds to you know help [sympathetic woman sits behind a computer]

Nigerian Prince's in distress. so those are credit ratings if you find yourself

in a position to care about them well now you know what they mean and how to

interpret them. as for your personal credit score well just make regular

payments don't spend well beyond your means and refrain from ordering one of

everything off Amazon and you should be just fine. [woman shops from computer]