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Your Credit Score MATTERS!
How else could this topic be started? Most people know that a bad credit rating affects the interest rates you pay on mortgages, credit cards, and small business loans...but it costs you so much more than you would think in other areas.
Your credit score affects things such as your car insurance premiums. In fact, drivers with poor credit driving the same vehicle and having identical driving records will pay between 20%-50% more for their insurance than someone with good credit (source). Why? Because Insurers believe that people with good credit are more responsible. But credit scoring is not limited to insurance. Your rent, your new job opportunity, you cell phone/utilities, even your marriage can be affected by your credit score.
How can I get my score?
Probably the best place to get your score is at www.myfico.com where a single credit score costs you $15.95. The cheapest place to get it is at www.annualcreditreport.com where, once you register to receive the free annual credit report that is mandated by law, you can pay $6.95 (as of this writing) to see your score from a single provider (Experian, Equifax, or TransUnion).
So why is MYFICO the best if it costs twice as much? The reason is that your FICO report will not only give you your score, but your report will also include items such as; how lenders view your score, a summary of positive and negative factors affecting your score, what you can do to improve your credit score in the short-term and a detailed account by account breakdown of your payment history. This information alone is worth the extra seven or eight dollars.
Finally, at least once every two or three years, check your score with all three reporting agencies to look for discrepancies between the reports. The cost to check all three is $47.85 as of this writing with a $5.00 discount for annual subscriptions. This author is named after his dad and I have found credit cards on my reports that were opened when I was 10 years old. I am thankful that dear old dad is prompt with paying his bills.
What about bad credit?
Generally, scores over 700 are considered low risk, 650-699 moderate risk, and less than 650 high credit risk (although this varies with each lender and the reasons for a lower score). So if your score is lower than 650 you may have some trouble getting a business loan.
But, bad credit is not always a death knell when it comes to business banking. If there is a legitimate reason why you have poor credit some lenders can look past it. Typically, health problems, divorce, etc (life events - such as a layoff) can ruin a persons credit report through no fault of their own.
Banks look at six main criteria when judging a business loan: Credit, Capital, Collateral, Capacity, Character, and Conditions or Terms of the loan explained further in Commercial Financing Article. The point is that there are various criteria a lender will look at when underwriting the loan. The above criteria are NOT a checklist. Most projects are week in one area or another. Lenders reduce exposure by weighting the above criteria and making adjustments. So for example: if your project is light on collateral they will require more cash down payment. Bad credit, usually means a higher interest rate and additional collateral to secure the loan.
Most importantly...be upfront about your credit issues. If you try to hide it they will find out anyway and it will make you look dishonest. Just tell them upfront...you have a great opportunity, lots of character but you have a few spots on your credit.
How can I improve my credit score?
The best day to start repairing your credit is TODAY! Don't wait because your most recent credit history is the most important. If you show that the last X months were current (paid on time) then it becomes easier to overlook the old blemishes on your report. That means that you have to start working out a budget to make payments on time and start knocking down those balances.
For some people professional credit counselors are needed or debt consolidation. Be careful though, unfortunately there are some disreputable service providers in this area. Generally, stick to nonprofit organizations that are associated with highly regarded civic agencies in your region. Receiving credit counseling, reduced payment, and/or debt consolidation can reduce your score temporarily. It also can be noted on your report that you are participating in credit counseling. Generally, during the time you work with an organization your available credit will be locked (meaning you can’t borrow more money). But, over the mid to long term your score will improve greatly.
For others Bankruptcy is the only option. The decision to file bankruptcy is a complicated one and has become more complicated by the new rules as of October 2006 limiting the number and types of debts you can charge off. This discuss is beyond the scope of this article (and this author) and is better had with a professional credit counselor and/or an attorney.
Once your credit is repaired starting a credit monitoring service may be advisable to help you keep track of your progress. MyFICO.com has a Free 30-Day Trial so you can find out what it is all about without obligation. This service can also be helpful to identify identity theft or fraudulent charges to your account a practice more prevalent in today’s world of online information and technology.
Suze Orman has teamed up with myFICO to create an easy-to-use kit, Suze Orman's FICO® Kit which includes three FICO® scores and credit reports and shows you how to get the lowest rates on credit cards, get out of debt quicker, save on mortgage and car loans, and correct credit report errors and omissions.
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