Editing Debt (section)

== Assessments of creditworthiness ==

=== Income metrics ===
The [[debt service coverage ratio]] is the ratio of income available to the amount of debt service due (including both interest and principal amortization, if any).  The higher the debt service coverage ratio, the more income is available to pay debt service, and the easier and lower-cost it will be for a borrower to obtain financing.

Different debt markets have somewhat different conventions in terminology and calculations for income-related metrics.  For example, in mortgage lending in the United States, a [[debt-to-income ratio]] typically includes the cost of mortgage payments as well as insurance and property tax, divided by a consumer's monthly income.  A "front-end ratio" of 28% or below, together with a "back-end ratio" (including required payments on non-housing debt as well) of 36% or below is also required to be eligible for a conforming loan.

=== Value metrics ===

The [[loan-to-value ratio]] is the ratio of the total amount of the loan to the total value of the [[collateral (finance)|collateral]] securing the loan.

For example, in mortgage lending in the United States, the loan-to-value concept is most commonly expressed as a "[[down payment]]."  A 20% down payment is equivalent to an 80% loan to value.  With home purchases, value may be assessed using the agreed-upon purchase price, and/or an [[real estate appraisal|appraisal]].

=== Collateral and recourse ===
A debt obligation is considered secured if creditors have recourse to specific [[collateral (finance)|collateral]]. Collateral may include claims on tax receipts (in the case of a government), specific assets (in the case of a company) or a home (in the case of a consumer). Unsecured debt comprises financial obligations for which creditors do not have recourse to the [[asset]]s of the borrower to satisfy their claims.

=== Role of rating agencies ===
{{See also|Criticism of credit scoring systems in the United States}}
[[Credit bureaus]] collect information about the borrowing and repayment history of consumers.  Lenders, such as banks and credit card companies, use [[credit scores]] to evaluate the potential risk posed by lending money to consumers. In the United States, the primary credit bureaus are [[Equifax]], [[Experian]], and [[TransUnion]].

Debts owed by governments and private corporations may be rated by [[Credit rating agency|rating agencies]], such as [[Moody's]], [[Standard & Poor's]], [[Fitch Ratings]], and [[A. M. Best]]. The government or company itself will also be given its own separate rating. These agencies assess the ability of the debtor to honor his obligations and accordingly give him or her a [[credit rating]]. Moody's uses the letters ''Aaa Aa A Baa Ba B Caa Ca C'', where ratings ''Aa-Caa'' are qualified by numbers 1-3. S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. Thus a government or corporation with a high rating would have Aaa rating.

A change in ratings can strongly affect a company, since its cost of [[refinancing]] depends on its [[creditworthiness]]. Bonds below Baa/BBB (Moody's/S&P) are considered [[High-yield debt|junk]] or high-risk bonds. Their high risk of default (approximately 1.6 percent for Ba) is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to [[Default (finance)|default]] on their debt. These types of debt are frequently repackaged and sold below face value. Buying junk bonds is seen as a risky but potentially profitable investment.