Effects Test

  

Your brother grabs your hand, hitting you repeatedly in the face. "Why are you hitting yourself? Why are you hitting yourself?" Then you finish after mom screams, "WTF are you doing?" and she looks at your red right cheek.

Yes, you can see the effects. She tests with her finger and when you wince, the weekend is dead for your brother.

In fact, the Effects Test derives from the Equal Credit Opportunity Act, which demands that lenders or creditors give every gender, race, religion, sexual preference, etc. an equal opportunity to gain credit. Amex cannot only print cards for rich, white men. The difficult part in creating an Effects Test revolves around how to financially define "equal." A standardized set of metrics had to be created, such that "racial gerrymandering," i.e. those living in, say, African American neighborhoods, weren't then targeted to not be given credit purely because of their zip code.

Adding complexity to the notion, lenders don't want to loan money and not be paid back their hard-earned principal, let alone the opportunity cost of the interest they would gain from lending to "safe" borrowers. So...requiring lenders to lend, but not forcing them to make loans they don't want to make...is a difficult tightrope, which defines the series of questions behind the Effects Test.

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Finance: What are credit ratings, and ho...59 Views

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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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