In previous newsletters, I have written about the myths about what affects and does not affect your personal credit score. Although there are a number of things that a lender will look at before offering commercial financing, a credit score very much will play a big part in their decision for approval and rates. All lenders have thresh holds with credit score if you are anything below a 750. Most commercial buyers are between 550 - 700 so the difference in rate from 600 to 650 can mean a number of more lenders willing to compete for your business. You may be surprised how you can raise your score by just paying attention to a few small details and getting the ”myths” out of your mind.

I encourage all my clients to run a free credit report at www.annualcreditreport.com. This will show your credit report from all 3 major reporting agencies. (Experian, Transunion, and Equifax) You will see exactly what a lender is looking at versus a Credit Karma (or similar) report which lenders do not consider.

I am told almost weekly by a client that they were not aware of a collection or past-due account due to having moved or sometimes just never being contacted. It is not that difficult to monitor and set a goal of 700 or higher to get the best possible rates. Pay off any collection accounts that you can. I would estimate that 50% of all collection accounts are less than $100 but they affect your score greatly. For larger collections or past-due work out a payment plan to get them paid off.

There are also credit repair agencies that will help you get derogatory accounts eliminated. If you would like a referral to a credit repair company please email or call me.

Below are some of the myths of credit…

1. "Paying off delinquent loans removes it from your credit report"

   If you've paid off a delinquent loan or credit card balance, you may think that it's then removed from a credit report and will no longer affect your credit score. Negative information such as late payments, collection accounts, and bankruptcies will remain on a person's credit reports for up to seven years. Certain types of bankruptcies stick around for up to 10 years. Paying off the delinquent account won't remove it from a credit report, but it will update the account to indicate it as “paid”.

2. "Canceling credit cards boosts my credit score"

   This can often be a popular thing to do for therapeutic reasons but closing an account actually damages your credit score, especially if it's one with long good payment history. Not only does the loss of history affect your score now but the drop in your debt-to-available credit ratio does as well. Sometimes a credit card's annual fee is just a cost of doing business.

3. "Too many inquiries always hurt"

   While a lot of inquiries can certainly drop your score a few points, this fact is largely inflated. Most scoring models actually allow inquiries within a certain time frame to just be considered one inquiry(as far as the score is considered) as the credit bureaus know the inquiries are most likely to be tied to the same loan request. All inquiries fall off after 24 months.

4. "Pulling your own credit affects your credit score"

   This is absolutely not true. Not only does a consumer have unlimited use of a service such as credit karma and many others, but as mentioned above, every consumer is allowed a complete report from all 3 credit bureaus at www.annualcreditreport.com This is available for no cost on an annual basis and does NOT count as an inquiry. It won't show your score but it will show all accounts that the bureaus are seeing. This allows you to take appropriate action if you see any errors.

5. "Paying on time each month results in good credit"

   This is another case where a debt utilization ratio comes into play for your credit score. The idea that simply paying your credit card bill on time every month will give you good credit isn't necessarily true. If your utilization is high, then you can have your FICO score drop dramatically. By ratio, I mean if you have a $5000 credit line and you run a balance consistently above $4000 it has a negative effect than if your balance was at $1000. The more available credit on any credit card is a good thing. Credit bureaus and lenders put a lot of weight into ratio utilization.

6. "You must be in debt to have a good score"

   Not true. A key factor that determines your credit score is your debt-to-available credit ratio. If this is too high, your score will drop. Another area that impacts a credit score is not whether you pay the balance off in full each month, but rather consistent on-time monthly payments, As long as you make your payments on time, you can maintain a great score with little to no debt.

7. "FICO scores are locked in for six months"

   Credit scores can change monthly as the creditors update the status of your accounts each month. There's no way to know exactly when in the month the creditors report to the agencies they subscribe to.

8. "My debit card can't affect my credit"

   While a debit card does not report to the credit bureaus, it can help or hurt you if it is tied to an overdraft line of credit. An overdraft line of credit is basically a line of credit that is available in the event that you overdraw your checking account. If you dip below zero, the debit card will still work, but instead of drafting your checking account, it will begin pulling on the line of credit. If you fail to pay on the line of credit (most accounts are auto-paid for at least the minimum due, assuming you have enough money in your checking account by the billing date) or if you use up too much of the available credit, you can hurt your score.

9. "A secured credit card helps build credit"

   While a secured credit card can possibly help you build credit, it's important to understand how they work and to be aware of their limitations. Secured credit cards are not the same as pre-paid credit cards, which can't help you build credit. Not all secured credit cards report to the credit bureaus, and generally even the ones that don't report to all the bureaus. This is because it costs the creditor money to report to each bureau and, by definition, secured credit cards cater to sub-prime borrowers with low credit limits, which can limit the bank's ability to make money.

10. "Co-signing a loan won't hurt as long as the responsible party pays"

    If you add yourself to someone's loan on an amount large enough to affect your debt-to-income ratio, then you're hurting your credit. If you need your own loan in the future, you may be unable to secure it if your credit shows too many other financial obligations. The lender may or may not accept a letter stating that you do not pay the bill in order to get you qualified, but you're still legally responsible.

I hope the above information is helpful. I encourage anyone who sees a window of opportunity to improve your score to seriously consider the effort that it takes. The difference in rate for a higher credit score can mean thousands of dollars over the course of an equipment loan. Those dollars can be used elsewhere to grow your business!

Have a great month!

Tim