Posts Tagged ‘debt’

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Why Greece’s Debt Is Our Problem

Wednesday, June 23rd, 2010
Will Europe’s shaky financial situation cross the pond to the U.S.?
  • Moody’s – a major credit rating agency – handed Greece an awful credit score on Monday, and Wall Street reacted with a distinct slump.
  • The low credit score means low confidence in Greece’s ability to dig out of its debt crisis. Even the bailout plan set out by Greece’s neighbors wasn’t enough to convince the analysts at Moody’s that things would turn around anytime soon.
  • The fact that the U.S. market reacted so directly to this news illustrates the strong link between the European and U.S. economies. Still, analysts predict that the U.S. economy will continue to grow despite this temporary setback.

Facts & Figures

  • The DJIA was down 20.18 points (-0.2%) by the end of Monday
  • At the same time, the value of Bank of America stock fell 1.22% and JPMorgan stock dropped 2%

Best Quote

“It was not a huge surprise that Moody’s is following suit. But it is another reminder of the negative news stream coming out of Europe.” – Win Thin, Currency Strategist, Brown Brothers Harriman

Why is it good to have a credit history?

Wednesday, October 14th, 2009

When you’re hiring someone for a job, the best choice is probably a person who has a reputation for doing similar jobs well in the past. Although someone without any established reputation is better than someone with a bad reputation, he’s still something of a gamble – you have no special reason to think he won’t perform the job well, but no reason to believe he will, either.

Credit history follows the same principle. It’s basically a record of how you’ve used credit in the past. How much do you owe right now? Have you made your credit payments on time? Have you had any financial problems? In credit as in anything else, a long history of good behavior is a great asset because it inspires trust. For example, a bank may be more inclined to let you take out a loan if you have an excellent credit history; if you’ve repaid your debts in a timely manner in the past, odds are you’ll deal with their loan in the same way.

Debt is…

Friday, October 2nd, 2009

Debt is an amount owed to a person or organization for funds borrowed. For example, if you were to get a loan to pay for college, you are in debt and owe the bank however much you  borrowed plus a pre-determined cost in the form of interest.

Nonprofits In Debt? Businesses Aren’t The Only Ones Going Bankrupt

Thursday, September 24th, 2009

While nonprofits are somewhat restricted when it comes to investing, they can basically act like any hedge fund or corporation. In the past, this leeway allowed nonprofits to grow their assets enormously, but right now it’s causing them some financial headaches.

  • For a while now, nonprofits have been actively making risky investment decisions and racking up debt. This high-risk, high-return investing style allowed many colleges, museums, and nonprofits to expand rapidly.
  • A large portion of the debt is from tax-exempt bonds that nonprofits were allowed to issue – cheap debt, with potentially high returns. After the financial crisis, nonprofits’ assets plummeted in value, yet they still had huge debt obligations.
  • Without an increase in revenues (through donations or property sales), many charities are going to end up bankrupt!

Facts & Figures

  • According to the IRS, the value of tax-exempt bonds issued by nonprofits rose from $98 billion in 1993 to $311 billion in 2006.
  • Brandeis University has $208 million in tax-exempt bond debt and is selling its art collection to pay for it.
  • Copia, a culinary institution in California, went bankrupt because of $78 million in bond debt.

Best Quote

“[O]ver the next several years nonprofits across the country will have to renegotiate bond covenants, reduce services, cut staff or actually default and face foreclosures, repossessions, and in some cases, even bankruptcy.” – Norman I. Silber, Law Professor at Hofstra University

Leverage is…

Friday, August 21st, 2009

Leverage is an investment technique in which you use a small amount of your own money, and borrow the rest to make an investment of much larger value. In that way, leverage gives you significant financial power. If you borrow 90% of the cost of a home, you are using leverage to buy a much more expensive property than you could have afforded by paying with your own cash.

Bankruptcy is…

Thursday, August 20th, 2009

Bankruptcy is a legal procedure which occurs when a company in debt is unable to make the payments it owes and therefore the assets of the company are distributed to the creditors. Filing for bankruptcy can be either voluntary or involuntary but is an indicator that a company cannot raise enough money to repay the debt without selling its assets.

Individuals can also file for bankruptcy for basically the same reason: they have more debt than they can reasonably repay. When you file for bankruptcy, your debts are either forgiven or reorganized into a viable payment plan. A declaration of personal bankruptcy will remain on your credit record for seven to ten years.

What happens if you don’t pay back a loan?

Monday, August 10th, 2009

Normally, people who can’t pay their loans declare bankruptcy, which is basically an acknowledgment that you are incapable of recovering from your debt. If you’re really in over your head, sometimes bankruptcy can be the only option, but it’s generally a last resort – your debts are forgiven, but your credit score takes a massive hit. And with a low credit score, it’ll be a lot harder for you to get loans in the future.

But suppose you don’t declare bankruptcy and just soldier on without repaying what you owe. What happens then? At first, you probably just continue “rolling-over” the loan and paying more and more interest on the item you purchased.  If you took out a loan for a tangible item, the lender usually comes to repossess it. For example, if you’ve leased a car and you stop paying the lease, the company that loaned you the car will just take it back.

But if there’s no way for the lender to repossess the loan (if the loan was money, for example), the company has to take the matter to court. The lender can decide either to sue you (which basically forces you to either pay back the loan, declare bankruptcy, or be convicted in court), or to garnish your wages, which means that a judge decides to award a certain percentage of your paycheck to your creditor until the loan is repaid.

Once you get into serious debt, it’s very difficult to get out unscathed, so it’s better to avoid that decline altogether; you’ll just get forced into one of the above positions, and all of them have unpleasant consequences.

A Credit Score is…

Thursday, July 30th, 2009

A credit score is a number that describes how well you make payments on things like credit cards. It’s like your debt-repayment batting average. Credit bureaus keep track of your credit history and publish that information in the form of a 3-digit credit score, which can affect how creditors – like banks and even insurance companies – will do business with you.

Credit is…

Wednesday, June 17th, 2009

Credit is an arrangement in which you gain something of value now in exchange for your promise to pay the lender back at some later time (usually with added interest). For example, when you buy a pair of jeans with your credit card, you agree to pay the credit card company later in return for the money you need to buy the jeans now.

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