Home Page

Credit Crunch A reduction in the general availability of loans, or willingness of lenders to extend credit.  Banks and other creditors typically tighten the conditions under which they will lend money.  Also may be called "credit squeeze" or "credit crisis".

Debt Ratio When applied to businesses, it is a financial ratio comparing the value of company's assets with the the debt it owes.  The debt ratio is calculated by dividing the company's total debt (or liability) by the value of the company's total assets (all of the stuff it owns, which accountants call current assets, fixed assets, and other assets such as 'goodwill').

When applied to people, it is a ratio comparing the person's income with the money that he or she owes.  Generally, it is calculated by dividing the person's monthly income, before taxes, with his or her monthly payments (minimum payments for housing, credit cards, auto loans, school loans, etc.).

Debt Settlement Generally refers to a negotiation in which the person owing the money (the debtor) and lender or creditor agree to a reduced balance that will be regarded as payment in full.

The debt settlement industry has been plagued by misrepresentation and fraud.  In theory, the company uses its expertise to negotiate with creditors on behalf of the debtor to get the debt reduced.  Unfortunately, in many cases money paid to such companies may not be applied as the debtor anticipates, or creditors may not stop their collection activities.

There have been repeated suits by state agencies to stop abuses in the field.  There is a constant stream of such companies going out of business because of such suits and other issues, only to be replaced by new names offering similar services.

"Free Credit Report" When offered in advertisements, this phrase is almost certainly a scam. If you visit the major advertiser's web site, you will be asked a series of questions, which include credit card numbers.  You will get your "free reports", and then you will be charged $14.95 per month, or $179.40 per year--pretty expensive for something advertised as free.  (You may cancel your membership without charge, but only within 7 days your order--well before any charge appears on your credit card statement.)

Since June 2004, the three major credit reporting companies have been require by the FTC to provide consumers with free annual credit reports.  These can, in fact, be obtained on line for free, without any obligations.  See Free Credit Reports.

Around the time that the rule came into effect, credit reporting companies began the "free credit report" scam.  The FTC allowed the scam to continue for 6 years. Finally, in April, 2010, a new rule was adopted which requires such sites offering free reports to contain a disclosure notice directing consumers to the government approved site.  Unfortunately, the major advertiser immediately began claiming to charge $1 for the credit reports thereby skirting the rule.  Others have begun offering "free credit score", also skirting the rule.

Short Sale A sale of real estate (such as a home) in which selling price is less than the balance owed on loan or mortgage on the property.  Because the lender is entitled to full payment when the property is sold, the sale can only occur if the lender agrees accept less than the full balance of the loan.

Agreeing to a short sale may benefit the lender when the seller is likely to default on the loan.  In such event, the lender will incur foreclosure costs, and may even receive less for the property than it would receive from the short sale.

The seller may benefit by being released from part of the loan, but he or she may (depending upon the conditions of the sale) still owe that part of the loan which has been waived by the lender to allow the sale.  The seller may also benefit by  avoiding a foreclosure on his or her credit.

Underwater While the dictionary simply defines this as being beneath the surface of a body of water, the financial analogy is having less money than one needs to meet one's obligations.  If one is struggling meeting the obligations, the analogy would have one trying to keep his or her head above water, or trying to stay afloat.  Similarly, a home may be underwater financially if more is owed on it than the amount which may be realized from its sale.


This page was last revised: 04/10/10