Friday, December 30, 2016

Managing Personal Credit for Business Related Financing

By: Jane Ray
Business Advisor
Guam SBDC

Sometimes having a great business idea isn’t enough to bring your dream into reality.  There are factors such as the 5 Cs of Credit that will affect your business’s ability to get the financing that it needs.  One of those Cs is credit score.  Credit score is an important factor that can have a significant impact on your quest to financing.  Your credit score reflects how you have handled your personal credit in the past and predicts the likelihood of how you will handle it in the future.  That three digit number can reflect your character as a business owner and also demonstrate how you have handled your own personal finances.  The way you manage your personal finances can demonstrate how you are going to handle your business finances in most cases.  Therefore it is imperative that you, as a business owner, should know your personal credit score and credit history before reaching out to lenders.

How do I check my credit score?
Generally, you can retrieve your personal credit report from one of the three credit bureaus; TransUnion, Equifax, and Experian.  As a consumer, you are allowed to obtain a free copy of your credit report through all three of the credit bureaus every year.  The credit reports will allow you to check your personal information; name, social security number, and address.  You should also check your account history, account information, late payments, collections, and tax liens.  It is recommended to check for any unexpected errors or surprises.  This will allow you to correct any errors and address any issues such as collections prior to applying to a financial institution.     

Since financial institutions are not required to report your activities to all three credit bureaus, some information can appear in one bureau but not the other.  It is best to check with all three credit bureau reports to ensure accurate information is reflected on each of those reports.  Some financial institutions only obtain a single credit report from the credit bureau with which they work directly when reviewing loan applications.  It is crucial to check credit reports from all three credit bureaus.   

Personal credit scores range from 300 to 850.  Credit scores vary between credit bureaus; each bureau has its own scoring models.  Generally, credit score is computed based on the following components:  payment history (35%); capacity (30%); length of credit history (10%); types of credit used (15%); and new credit (10%).  Paying bills on time is one of the most critical parts of maintaining a good credit score while avoiding excessive use of lines of credit and credit cards is another way to not adversely impacting your credit.  Any usage over 35% of the credit limit can considered excessive; therefore keeping track of what you spend on credit card is good financial practice.     

How to dispute when there is an issue?
If you identify errors or issues on your credit report, you can dispute the information with the credit bureau the information is coming from.  You can either dispute the information online, by telephone, or by mail.  It is helpful to have a copy of the credit report with the incorrect information when disputing; each report has a specific number identifying when it was generated.  This credit report number can assist the credit bureau in finding the incorrect information faster.  You should also provide any supporting documentation if you have any.  It is not recommended to send the original document however a copy of the document will be adequate.  Expect a 30 to 45 day timeframe for processing as the credit bureau will contact the source to verify, correct, and update the databases.  If you are experiencing identity theft or other credit issues, you can request for Security Freeze or Fraud alert on your credit report to prevent any unauthorized access.  Before selecting either of those options it is important to understand that Security Freeze and Fraud Alert will prevent creditors from accessing your credit reports unless you have provided the authorization.  Sometime it can also delay loan application process if you have forgotten that you placed one of those options onto your credit report.         

How long does negative information remain on my credit report?
Types of Information
Duration
Accounts paid as agreed
10 years from the date of last activity
Accounts not paid as agreed
7 years from the date the account first became past due
Late or missed payments
7 years
Collection accounts
7 years
Judgements (paid or not)
7 years
Paid Tax Liens / Unpaid Tax Liens
7 years / Indefinitely
Bankruptcy  - Chapter 7 / 11 / 13 non-discharged or dismissed
10 years from date filed
Bankruptcy – Chapter 13 (Discharged)
7 years from the date filed
Credit Inquiries
2 years
Source:  Moogalian, Diane (2010, May 10). FAQ: How Long Does Information Stay on My Credit Report? Retrieved from October 17, 2016, from http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/

Where can I find information about credit?
Have realistic expectations and be aware that paying past due payments or addressing delinquent collections will not immediately improve your credit score.  It takes time to improve your credit after financial difficulties or hardship.  There are many online resources that can help you if you are in need of financial education.  Each credit bureau has an educational center that discusses credit related topics.  Other web sites, such as Credit Karma and Nerd Wallet, have features on comparison shopping on different credit products and credit report monitoring services that are available to you.  If your financial issues come from poor financial habits, seeking professional help from a financial counselor or financial professional might help you address the root of the issue. 


If you are currently in business, or are planning to go into business, you will require funds to start or to expand your business.  Do not circumvent or work around adverse credit issues or you may miss a once in a life time opportunity.  It is better to address it now rather than wait until later when you are in urgent need of financing. Once you miss the opportunity, you won’t know when the next one will arise.  Being financially responsible with your personal credit will prepare you to achieve your financial dreams by being your own boss.       



Jane Ray, MS CCFCU received her Bachelor in Business Administration with a concentration in Finance and Economic from the University of Guam. She then received her Master in Accounting and Financial Management from the University of Maryland University College.  Ray has over ten years in commercial lending experience and previously awarded the Small Business Banker of the Year award by the Small Business Administration.