Do Bonds Have Credit Scores?

Can I borrow $10,000?

What do you need to know to make a good decision?

Let’s say we’re friends, so you don’t want to charge me any interest, but is there anything more you’d want to know?

Well, I guess you’d need to know how long I want to borrow it for. Is it for a month or ten years? That might affect your decision to lend it to me.

What else? You’d probably size me up and try to figure out if I’d be able to pay you back. Do I have a secure job? Have I borrowed money from you in the past and paid it back? Do I owe a bunch of people money? Heck, a good idea might be to get my credit score. This number would tell you how responsible I am with loans. A high credit score means I have my stuff together. A low credit score means I’ve had some problems in the past – maybe I filed for bankruptcy, have some late payments, or just owe too many people too much.

Guess what? The questions you’d have for me if I wanted to borrow money are the same questions you’d have if you buy a bond.

Again, a bond is just a promise for someone to pay you back, just like a friend borrowing money from you.

But, of course, we have a few fancy terms for you to be aware of:

The length of the loan is simply called the term. This can be long-term, which is any loan or bond 10 years or more. Then there’s mid-term, which is usually 3 to 10 years. And then short-term, which is under 3 years.

Now, instead of credit score, we say credit quality. It means the same thing, though. They even have a grading system from “A” all the way down to “D.” So, as you can imagine, a credit quality of “A” means this is a borrower that has great credit. Chances are you are going to get your money back. A credit quality of “C” means this borrower is pretty shaky. You might not get your money back.

So if you might not get your money back, why would you ever do it? There’s a million-dollar reason that you’ll learn in the next lesson…

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.