Question: In a few months I'll need to borrow money to buy some new equipment for my business. But I fear that my credit report has blemishes, and my credit score may be on the weak side. Are there some things I can do to improve my credit situation?
Answer: Yes, there certainly are actions you can take to improve your credit. And, there are some things you should definitely avoid doing. Let's talk about this.
You're smart to start as soon as possible. Credit improvement is a slow process. And this is now more important than ever, because your credit information is used for more than just qualifying for a bank loan. Other activities, like getting insurance coverage, determining the interest rate on a car loan, or renting a house - these all may involve scrutiny of your credit history.
First, recent laws make it much easier for you to access your personal credit information. But be careful about this. Many of those "free credit report" ads and websites have strings attached. Typically, the supposedly free credit report comes only with a paid subscription to a credit monitoring or similar service of questionable value.
The genuine, government-approved site is annualcreditreport.com. This is a joint effort of the three major credit reporting agencies: Equifax, Experian, and TransUnion. These agencies compete with each other for subscribers (banks and other credit grantors). The Fair Access to Credit Transactions (FACT) Act enables you to get your credit report, free, once a year from each of the three. Suggestion: A smart strategy is to rotate the three agencies, getting a report from one of them every four months.
As to your credit scores, there are several, and they're not all created equal. The gold standard is the FICO score, which is issued by Fair Isaac Corporation based on their secret scoring system. Currently only Equifax offers the "real" FICO credit score, so start there first. The additional fee is about $10. You can also purchase your FICO score directly at www.myfico.com.
So, start by getting your credit report and FICO score, which will be between 300 and 850. A score over 720 is considered "creditworthy." If your score is somewhat below that, it's time to get to work. Go through the report with a fine-toothed comb. Highlight anything that looks unusual. Allocate some time for this, because there will be information gathered over seven or more years.
A typical credit report has sections for:
- Your personal identification and information
- Summary of your accounts and payment history
- Public records.
Make a note of anything that may be incorrect. Consider this: The credit reporting agencies process around five billion pieces of data per month. If they do so with an error rate of one-tenth of one percent (pretty good!), then they are entering five million errors every month. It's likely you will find some errors in your report. If you want to contest an item in your credit report, submit a brief statement to the reporting agency by certified mail.
And, some thoughts if you have a low credit score (below 600): Beware of most of the "credit repair" or "credit doctor" offers. The Better Business Bureau (bbb.org) reports that there are thousands of complaints about these offers; many of them are outright scams. They commonly ask for upfront fees (which is illegal under the FACT Act), and may deliver no real value. Remember that no one else can do anything to fix your credit that you can't do. No one can remove valid negative data, only erroneous information. For the real deal, Google "Consumer Credit Counseling Services" and see what fits your needs.
The exact formula for the FICO score is a secret. Here's the best guess of what goes into that three-digit number that determines our financial lives:
- Your on-time payment history is a major factor: probably 35 percent.
- Credit balances owed now, as compared to available limits: 30 percent.
- Overall credit history (borrowing patterns): 15 percent.
- Types of credit owed (revolving, mortgages, etc): 10 percent.
- Number and type of recent credit requests: 10 percent.
Based on that information, here's a short list of ways to improve your credit.
- Pay all bills on time, especially installment debt. Never go over 30 days late.
- Always pay at least the minimum due monthly on credit cards.
- Keep your credit card debt under 35 percent of your available credit limit.
- Be stable and mixed in your borrowing habits - no surprises.
- Charge at least a small amount on several cards each month, and pay it off.
- Avoid applying for credit you don't really want, even if it offers an incentive. - Don't close out paid-off credit cards, especially if they are long-established.
For more information and credit-improving hints, check out the Federal Trade Commission at ftc.gov; click on the "Consumer Protection," then "Consumer Information" tabs.
ABOUT SCORE
To learn more about managing cash flow, and other small business matters, contact SCORE, "Counselors to America's Small Business." SCORE is a nonprofit nationwide organization with more than 13,000 volunteer business counselors who provide free, confidential business counseling and low-cost training workshops to small business owners. Call the local SCORE chapter at 360-685-4259 to schedule an appointment. For details about the organization,visit SCORE.org.
