Do You Know What
Your Credit Score Is?

When it comes to the personal credit score, I don't know what the exact statistics would be, but my own personal guess would be that at least 90% of the population has no idea what their score is at the present time.

Do you know your credit score?

Most people don't think their credit score is anything to worry about.

But here's a news flash... It really is.

Our society become so dependent on consumer credit that you can't avoid it even if you wanted to.

Many people may proudly declare that they don't utilize any credit, but even this can become a problem.

Ok, let's stop the sky from falling and back up for a minute.

Here's credit 101.

The single biggest factor that is the most common to any lending decision is your credit history and credit score.

Why?

Because it relates to basically anyone who spends money and utilizes services.

It also creates an enormous volume of data that allows the stats geeks to devise complex formulas to predetermine and predict an individuals ability to pay debts.

So, when lending institutions want to process large volumes of loan requests, one of the ways they make lending decisions quickly and consistently is via your credit score.

It doesn't really matter if your personal credit score is accurate or not, statistically speaking, a lender using a credit score as a decision making tool, will possess a higher quality loan portfolio.

But isn't your credit score always accurate?

It doesn't have to be.

You see the credit score reporting business is a business.

Companies collect customer transactional information from businesses and in return give the businesses access to the credit reporting agencies universal customer credit database.

These credit reporting agencies also sell access to both business and personal credit reports for a fee.

The information is provided and recorded, whether its correct or not.

Mistakes can only be removed once verification of the mistake has been received by the credit reporting agency from the company that created the mistake.

Unfortunately, the system is not focused on fixing mistakes. There's no real money in that.

So even though the credit reporting agencies are required by law to remove any incorrect information, it can be like pulling teeth to get an error corrected.

Here's How Your Credit Score Is Calculated

Just like the secret receipe for Coke or the Google search engine mystery code, the credit reporting agencies utilize a complex algorithym that calculates your credit score from certain transactional activity.

The credit score takes into account activity related to revolving and installment based credit that is not secured by hard assets.

This includes credit cards, term loans, trade accounts, public utilies, lines of credit, and so on.

The scoring system calculates your credit score by factoring in the timeliness in which you make payments, the amount of credit available, and the number of times you apply for credit.

Each reporting agency may not even use the same exact scoring system, so you could potentially have different credit scores based on the same activity.

The scoring system provides you with a credit score between 300 and 900. A score of 650 or higher is normally considered good credit by most lenders.

The three actions you can take that can absolutely destroy your credit rating are 1) late payments; 2) high utilization of available credit; 3) excessive inquiries.

Credit inquiries are performed by people you apply to for credit or services.

Every time you apply for a department store credit card, that's a credit inquiry.

If you apply for a cell phone, you will get an inquiry.

Same goes for buying anything on credit or applying for business or personal financing.

This all sounds reasonable, so what's the problem?

There may be no problem.

But if there is, it can be devastating to your personal or business plans and cash flow if financing is required.

There have been reports that between 40% and 50% of U.S. consumers have errors on their credit reports which are likely reflected in their credit scores.

In most cases, most people are not aware aware of any problems until they are actually applying for credit, which is basically too late to do anything about it.

If a credit decline is credit score related, there is no guarantee that the lender will even share this with you, leaving in the dark, wondering what went wrong.

If you do discover an error that can be corrected, it can take months, even years to get it fixed, potentially putting off your plans, or forcing you into higher cost financing.

What compounds the problem is that most lending programs are mechanically scored and if the credit score is not at a certain level, you can be automatically declined or resigned to a higher cost of borrowing, even if you prove to the lender that your credit score is in error.

As bizarre as it may seem, lenders do not usually allow humans to interpret the information in your favor. The reason is obvious; they want a certain level of consistency, regardless if the information their employees are working with is accurate or not.

Here's a real life example of why you need to manage your credit score

A couple imigrates and sets up business in their new country.

They start establishing credit through acquiring and using credit cards (good)

Credit cards can be an excellent way to build your credit rating, provided that you pay off the entire balance every month and never make a payment more than 30 days late.

I have seen credit scores in excess of 800 (rare) from the utilization of a single credit card.

Back to our story.

The couple uses their own money to start the business. Immigrants are usually resigned to this until they establish credit.

The business is successful very quickly and their first year is profitable, setting them up for certain forms of small business financing.

They check their credit, and everything is in order.

Now its just going to take two more months to get their financials completed and they can apply for credit.

Everything is going well, the business is growing rapidly, and new capital for expansion will not come soon enough.

Two months go by and they apply for the business loan.

They get declined.

Why?

Because two months ago, they purchased some consumer electronics from a big box store on credit.

They wanted to buy with cash, but because there was no price discount for a cash purchase, they took the 6 months interest free program.

Not unusual, right? I mean you might do exactly the same thing.

Here's the problem.

First of all, the store had to make a credit inquiry to grant the credit. The couple all ready had a number of inquiries during the year, so this reduced their credit score.

Second, even though there were no payments dues for 6 months, there was a monthly administration fee of $10.43.

Once the couple purchased the furniture, their mind set was that no payments were due for 6 months and they overlooked this admin fee.

When they applied for their business loan, the admin fee showed up on their credit reports as 30 days past due.

The impact was a 50 point reduction in their credit score which dropped them below the minimum credit score requirement of the only institutional lender that could finance them at that point in time.

The explanation held no weight. They didn't have the score, so they didn't get approved. Period.

Key Take Aways

1. Everyone has a credit score and should be aware of what it is and how to improve it.

2. The credit reporting system does not have to be fair.

3. Your credit score is a valuable asset that can make and save you money over your life time if you manage it properly.

4. Poor credit practices will drive up your cost of borrowing and restrict your access to financing and services.

5. You must monitor and manage your credit score on a regular basis if you want to be sure of its accuracy.

6. For small businesses, both personal and business credit are normally factored into the lender's decision making process.

 

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