For the past 5 years, we have been assisting clients in starting, sustaining, and/or expanding their business. During this time, the number one concern for the majority of our clients has been about credit. “My credit is bad, can you help?” and “there are a few negative items on my credit that I paid off, what can I do?” are just two of the many common questions every individual we have worked with has and must know the answers to in regards to their credit.

What do you need to know about credit?

It is all about risk. Credit is the most important tool you have available to you. It is so important that it can drastically effect your future, both in positive and negative ways. Having a good credit score is so crucial that a 5-10 reduction in your score can have a significant impact on what you are trying to accomplish.

What is credit and why do we need it?

Credit is a tool an institution such as a bank, auto dealer, department store, etc. uses to determine the risk of an individual. This risk assessment has a score attached to it. There is a special formula that is used to calculate each individuals score and this score that is given to each individual allows the creditor to either approve or decline based on an individuals past performance. Aside from the score, there is a credit report highlighting the details of your credit, which is directly associated with your score.

  • A low credit score of 540 automatically tells a creditor that there is something wrong. Typically, it will mean that an individual borrowed money from a credit card and has been late multiple times or they simply neglected to pay as promised. It may also mean that their vehicle was repossessed due to non-payment.
  • A high credit score of 740 usually tells a creditor that this person is trustworthy and pays all their debts on time. Lenders love to deal with people with great credit scores because they are low risk.

So what can you do to fix your credit if it is low?

  • First: Get your credit report and begin reviewing it. There may be items on there that do not belong. For example, credit card balances that have been paid but still show as a balance or a medical bill which you paid but was never reported as paid. These items can truly hinder your score, which is why printing your report and understanding it is the first step.
  • Secondly: If there are any items falsely reported begin a call of action. List all wrongly claimed debt. If you know that you have paid that debt, get a copy of the receipt and call the creditor. If you are able to prove to them that they have made a mistake, then ask them to give you a letter stating that it has been paid.
  • Thirdly: Take all letters proving your payment and send it to each credit agency. Once received, it will take about 30 days for the changes to be made and you will see an increase in your score.
  • Fourthly: If you borrowed money from a credit card and were unable to make payments for any reason, it has probably been sent to a collection agency or it may have been charged off. A charge off is the worst possible mark you can have on your credit. It means that attempts to collect the funds were tried over a period of time but were not and the creditor has given up and reported it as a loss in their books.

So what do you do at this point?

  • Depending on your current financial status you would have to think about how to make amends with these lenders. The only way to do that is if you contact them and see how much of that debt you can pay down. If you owe $25,000 in debt and that amount has been charged off, then you would want to call the lender and ask them to either put you on a repayment plan or to settle it for a lower amount.
  • It is your duty as the borrower to pay back the money they trusted you with in the first place. The only way to increase your credit score is by tackling these issues one at a time.
  • A creditor would prefer to get something back rather then nothing and it is always better to have a “settled” on your credit report rather then a charge off.
  • Example: If someone borrows $100 from you and promises to pay you back within 3 months and doesn’t do so, you would likely not trust that person again. In your eyes that person’s character has been tarnished. A few months go by and your friend calls you to apologize and offers to pay $50 of the $100 balance. Would you take it? Of course you would, because recovering some of the money rather then no money is always better. The same philosophy is applied to credit. It’s all about trust and your history along with your credit score proves how trustworthy you are.

What is a good credit score?

  • We are always asked by clients “what credit score do I need to qualify?” Our answer: The credit score is important, however lenders are not looking at the credit score these days. They are looking at the report and what makes up the credit score. The break down is as follows: Anything below a score of 660 is in the red, scores ranging between 660- 699 is average, and anything above 700 is very good.

A friend of mine just moved to the United States from Europe and over the past year he has tried establishing his credit. His credit score is currently above a 700. Does this mean he has good credit? Sure it does, but only for the 1 year he has had available credit. Lenders are also looking at the longevity of an individual’s credit history. Even though my friend has a 700 credit score, he will likely be declined if requesting a loan of some sort. That is because creditors do not have enough information or history to take make a good judgment.

In closing, remember that it is all about risk. Less risk means more money, higher risk means less money. Minimizing risk is key!

Paul Mazbanian (2011 SBA Young Entrepreneur of the Year – Los Angeles District Office)
SBC Lending