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Finance: What are credit ratings, and how are they interpreted? 43 Views
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What are credit ratings and how are they interpreted? Credit ratings describe a borrower’s likelihood to pay back their debts; it’s a look at how risky it may be to loan them money. Usually these are used when investors take on debt in a company. The company is assigned a credit rating, and investors can use that rating to determine if investing in their debt is a smart financial move.
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- Terms and Concepts / Credit
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Transcript
- 00:00
finance a la shmoop what our credit ratings and how are they interpreted?
- 00:06
well maybe you've heard your parents groan about all of their accumulated
- 00:10
debt or at least you did in high school and you know how it's sinking them. your [kid asks for dinner]
- 00:14
mom put the new fridge and dishwasher on her Amex and now it's all maxed out. your
- 00:19
dad meanwhile invested in a new set of golf clubs and put his flight to Myrtle
Full Transcript
- 00:23
Beach on his visa, and now well your dad might have a nice tan and maybe he's
- 00:28
shaved a few strokes off his game, but you and your sister are eating baked
- 00:32
beans out of the can and taking time to 30-second showers to cut down on you
- 00:37
know gas expenses, so credits evil right? you should only pay for something if
- 00:42
you've got the cash right now in your pocket to pay for it right? well no not
- 00:46
right it's true making purchases on credit and be abused and often is but
- 00:50
building credit ie showing the rest of the world that you can borrow money and
- 00:54
then pay off your purchases responsibly whether you're an individual or a
- 00:58
corporation is absolutely essential in making your way through this vast [computer game labyrinth pictured]
- 01:03
complicated world of ours and establishing your own credit rating. so
- 01:07
what really is a credit rating ?well it's a determination of your ability to pay
- 01:11
your debts fully and in a timely manner. all right well there are three major
- 01:15
credit rating agencies who specialize in making these types of evaluations for
- 01:21
the big boys ie large public corporations who borrow money all the
- 01:24
time. the agencies well they're the ones with catchy names like Moody's Standard
- 01:28
& Poor's and Fitch. note that these three are typically used to determine the
- 01:32
reliability of businesses to pay off their debts.
- 01:36
don't confuse credit rating agencies with credit reporting agencies, of which
- 01:42
the major players are Equifax Experian and TransUnion. those guys publish credit
- 01:48
reports assigning credit scores to individuals. so they determine whether
- 01:53
you're able to get that Prius you've had your eye on or whether you can get [orange Prius pictured]
- 01:56
the keys to a nice new condo or whether you can finally upgrade from your
- 02:00
antique typewriter to Mac. but credit ratings indicate whether
- 02:04
someone might want to trust this or that company to make good on their debts.
- 02:08
check out this table which gives you the rundown of Moody's and SNP ratings right
- 02:12
there. don't worry about Fitch for now they're low man on the totem pole .all
- 02:16
right for Moody's anything rated be a three or better is considered investment
- 02:21
grade. for S&P well it's anything triple b-minus or higher. so both agencies would [credit rating chart pictured]
- 02:26
recommend investing in a company's debt at the top of their class, but for any
- 02:31
failing below this line well they've kind of slapped a junk ish bond label on
- 02:36
it. in other words you know and take your chances. the better the grade the better
- 02:39
a company is done in keeping their books checking their boxes crossing their T's
- 02:44
and dotting your I's and likely it means that they're a low risk. and so
- 02:49
they get cheap interest rate. though the odds are paying back their debts are
- 02:52
high when the risk is low and they're encouraged borrow more money until
- 02:57
they're not a good credit risk. well the ones at the bottom of the barrel are
- 02:59
probably sending weekly emails soliciting funds to you know help [sympathetic woman sits behind a computer]
- 03:03
Nigerian Prince's in distress. so those are credit ratings if you find yourself
- 03:07
in a position to care about them well now you know what they mean and how to
- 03:10
interpret them. as for your personal credit score well just make regular
- 03:14
payments don't spend well beyond your means and refrain from ordering one of
- 03:17
everything off Amazon and you should be just fine. [woman shops from computer]
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