Honey, I Shrank the Debt

To a great extent, credit ratings are the result of a comparison between your earnings, assets, and the amount you want to borrow. Getting a bank to finance your purchase of a house should require that they look at both your ability to service the payments (your earnings) and the value of the property (the asset) before determining how much they will loan against it (your leverage). How can you increase your credit worthiness after that? Two ways: either make more or pay down the loan. In today’s recessionary economy, Americans have begun to take the second option. As a percentage of our nation’s GDP, net new borrowing has gone from about 10% to a negative 2% in the last few years according to the Fed, suggesting debt service is lightening the overall debt load of those who can pay it. We see, however, in some of the world’s emerging economies room for the first option to play a part. There, with trade surpluses and a growing middle class, assets can still appreciate. Getting debt free is a good idea. Getting a toe-hold in some of those countries with good growth potential may be as well.