If more credit downgrades force the Government to raise interest rates

Ensuing is an instruction review of whether further credit downgrades will force the Government to significantly raise interest rates, and other consequences.

If there is another, or more than one credit downgrade by Moody’s and Standard and Poors in the next year or two, there is an elevated risk investors of Government treasuries will demand higher interest rates.   If this very real prospect occurs, the consequences are enormous.

Once higher rates are demanded, the government will be forced to spend a greater percentage of it’s revenues on interest, causing it to spend less on other normal budget items.    Further, the longer the government continues to deficit spend at this point, the percent the government spends on interest on debt will accelerate more quickly.

There will be much greater pressure at this point to reduce deficit spending because of higher rates.   In order to accomplish lower spending, Government will be under intense pressure to cut spending.

The problem at this point is that due to the size of the deficit, spending cuts will not be enough & if the government even attempted to solve the problem with spending cuts,  the cuts would be so massive, they would likely cause a severe recession.    Therefore, significant revenue increases would have to occur.

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Leaseback – Why credit matters

For a leaseback transaction, in which the owner of equipment or real estate sells the asset for cash, then leases it back, does the business credit and personal credit matter?

In such a transaction,  if the wholesale or liquidation value of the asset covers the balance of the leaseback, then does credit matter? In fact, credit does matter.    In the event of non-payment and default, the value of the asset, especially equipment, may depreciate faster than the balance of the debt.

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In such a case, if business and personal credit were not reviewed for the leaseback, the lender may find themselves upside down and facing as loss on the transaction in a default situation.

Further, regardless if the value of the equipment or real estate asset, the lender’s preference is almost always for the borrower in the leaseback to pay as agreed rather than default.    In a default involving equipment, the lender is typically forced to hire an outside vendor to repossess the equipment, transport to a venue to liquidate, and will often receive lower than the balance owed on the debt, resulting in a loss.

Additionally, only a review of the business and personal credit can uncover judgement, collection, and tax issues that can jeopardize the lenders equity position in the transaction.

For these reasons, the lender in a leaseback will always want to review the business and personal credit of the potential borrower.

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Are credit inquiries really that bad?

September 4, 2017.  Much has changed in the world of credit inquiries in the last 25 years.  Many people believe that credit inquiries are quite and they should go to lengths to avoid them.

30 Years ago,  many people did not know what credit inquires were. In 2016 a significant percentage of the population knows about credit inquiries are.  Many believe that even one or two extra inquiries are quite harmful to their credit.    Are credit inquiries though, really THAT bad?
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In terms of credit issues that may be considered “bad”, credit inquiries are probably the least worst offenders.  Credit scores recover from credit inquiries faster than just about any other personal credit item that is considered derogatory.

When Credit Inquiries begin to hurt credit

Inquiries will have a very limited affect on a credit file if the number of inquires is small.   Credit inquiries begin to hurt a credit file more significantly if the number of credit inquires is more than about 5 in one month.    When some of these inquiries are from Car Dealers or Mortgage companies, they may not affect a person’s credit score at all.  If the number of inquiries is 5 in the last 30 days, try to minimize the number of inquires in the next 30 to 60 days.

Once an individual does have more than 10-15 inquiries within a month, as long as they go a few months without almost any inquiries, their score will recover quickly.  Their credit score will likely be close to what it was within 2 to 4 months.

In summary, are credit inquiries really that bad?    In many cases, a few credit inquiries on a credit file within 30 days have a minimal impact on someone’s credit bureau score.