ShmoopTube

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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reliability of businesses to pay off their debts.

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

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

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reports assigning credit scores to individuals. so they determine whether

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

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

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antique typewriter to Mac. but credit ratings indicate whether

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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