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Credit and Credit Reports for a Small Business

Small Business Administration and SCORE

WelcomeAgenda

Introductions

Ground Rules

About SCORE

Objectives

• Discuss Credit and Credit Reporting• Personal Credit & Business Owners• Explain how these credit reports work• Identify benefits to small business in credit

reporting• Identify risks to business from credit scams• Identify strategies to build or improve credit

What Do You Know?

What do you know about credit

AND

What do you want to learn about credit and credit reporting

Personal Credit & Business OwnersYour credit report serves as your financial reference to companies and lenders

When you apply for credit for your business, your personal credit will also be checked

Your personal credit will factor into whether you will receive credit and how much you will pay for it

Personal credit factors into all borrowing you do: loans, vendors, turning on utilities

Credit Reporting

• Provides information by banks, lenders, investors, landlords, businesses, government agencies

• Contains an analysis of :– Credit worthiness– Insurance underwriting– Employment– Certain licenses– Continued credit terms– Business needs

What’s In A Credit Report

• Identifying information: name, address, social security number, birth date, employment history

• Trade lines: credit accounts – type of account, account balance, & payment history

• Public Records: bankruptcies, foreclosures, law suits, wage attachments, liens & judgements

• Inquires: Who looked at your report past two years

Credit Report - Personal Information

• Name – Full name• Address – Current • Social Security Number• Birth Date – Full date: day, month, year• Current and former address• Current and former employers

Credit History –Trade Lines

• Details payment history: - how you paid your bills for the last seven years

• Usually includes: mortgages, credit cards, car payments, installment loans, and collection items

Credit Report - Public Records

• Bankruptcy • Back Taxes• Judgements• Back Child Support• Liens – Mechanical, liens on property• Defaulter Student Loans

Some Public Record Definitions

• Bankruptcy – A judicial action; Chapter 7 also called start over, Chapter 13 creditor repaid

• Judgement – A judicial action affirming debt is owed to another

• Lien – A legal claim against property (asset) that must be satisfied

• Foreclosure – Legal procedure that indicated inability to pay a mortgage

• Collection Accounts – Unpaid debts reported as sold to a collection agency

Credit History - Inquiries

• Hard Inquiries might hurt your credit • This is usually when you are asking for credit

• Soft Inquiries will not hurt your credit• Soft Inquiries are usually asking for information• Such as: You pull your own credit, an offer for credit in mail

• Hard Inquiries stay on your report for two years

Credit Reporting AgenciesThree Key Business Reporting Agencies– Experian – Business

– Equifax – Business

– Dun & Bradstreet – Business• Each of these agencies has extensive information on their

websites regarding their services.• Speak with a sales consultant about pricing on services.

Credit Reporting Agencies

• Consumer Reporting Agencies are: – Any person or business that assembles or evaluates

credit information on consumers

• Experian• Equifax • TransUnion

Annual Free Credit Report

Website - Free credit reports http://www.annualcreditreport.comPhone: 1-877-322-8228By Mail:Annual Credit Report Request ServicesP.O. Box 105281Atlanta, Georgia 30348-5281

Credit Reporting

Consumer Reporting Agency

What are some of the reasons a business ownermay have for reporting consumer credit information to a consumer reporting agency?

Credit Reporting

• Reporting Consumer Credit Manages Risk– Report of debt incurred by consumer– Notice of property used as collateral– Increases timely payments– Greater debt recovery potential– Uncover fraud– Locate debtors

Reporting To Credit Agencies

• Retail locations must have:Location with secured locksSeparate office with secured filesProtection of dataSecure computers or network such as cloud

Reporting Directly To Credit Agencies

• Some things to consider if you want to report directly

1. Minimum number of accounts reporting monthly2. Software for reporting and handling disputes3. Accurate record keeping and reporting4. Separate setup fees to pull credit5. Training6. Landlords or home-based businesses are generally

excluded from directly using the three main agencies

Other Options For Reporting

Consider reporting through a Local or Regional Agency

An option if you do not qualify to directly reportAllows you to Comparison shopYou know what fees and costs you may payLocal agencies may also act as a collection agency

Credit Report Errors• Over 79% of credit reports have errors and of

the 79%, 25% have errors that could get you denied credit

• If you find an error, dispute it immediately• Disputing inaccurate items is free – no need to

pay someone• Credit bureaus have 30 days to research and

send a response• You can’t change history – can not “fix credit”

Fair Credit Reporting Act

FCRA governs the collection, assembly, and use of consumer report information. Defines consumer credit reportingBusiness purposes for use of reportsFCRA governs how you may use credit scoresConsumer authorizations for use

Monitoring Your Own Credit

• You can monitor your credit these tools– www.annualcreditreport.com– www.myfico.com– www.creditkarma.com

• Your Bank or Credit Union• Credit Cards – Discover card has FICO• Private Service

Credit Reporting Continued• These factors do NOT influence credit– Age– Race– Gender– Religion– National Origin– Material Status– Source of Income– Income Level

Build A Better Credit History

• Consistently pay bills on time• Pay down current debt• Apply for an unsecured credit card, use for small

purchases, pay in full each month• Apply for a loan & make on time payments• Check your credit report regularly, every four

months, correct errors– www.annualcreditreport.com

FICO Scores• The three credit scores most lenders use to determine

your credit risk• You have three FICO scores, one for each of the three

consumer credit bureaus:– Experian– Equifax– TransUnion

• Each score is based on information the bureaus keeps on file about you.

• FICO score affects both how much and what loan terms (interest rate, etc.)

About Credit Scores

• Fair, Isaac & Co. calculates credit scores• FICO calculates scores for Equifax, TransUnion,

and Experian• FICO scores range from 300 – 850• FICO’s model used over 790 times a SECOND!• Bankers and lenders purchased over 10 Billion

FICO scores.

More on FICO Scores• Bill Fair and Earl Isaac & Company

• Scores typically range from 300 to 850. There are industry specific scores that range from 250 to 900

• To have a score, consumer must have one account aged 6 months or older and updated account at a national repository within 6 months

• Go to www.myfico.com to learn much more

Typical Classification of Credit ScoresCredit Score Description730-850700-729

ExcellentGreat

670-699600-669300-599

GoodAveragePoor

Credit Score Continued

Makeup Of Credit Score• Payment history – 35%• Amounts Owed – 30%• New Credit – 10%• Types of credit used – 10%• Length of credit history – 15%

Improve Your Credit Score

• Number 1 – Pay all bills on time• If you missed a single payment, catch up• Keep balances low on credit cards – below 30%• Pay off debt – moving it around not helpful• Keep your oldest account• Apply for new credit only when needed• Shop for large ticket items, such as a car, in short time

period; 14 days or less

Items That Lower Your Score

• Late payments• No available credit – maxed out cards• Collection items• Public records; bankruptcy or judgements

Credit Myths: True or False

1. I keep my personal and business lives separate. 2. I have a Tax Id number; I am not using my SSN so no

one knows my personal credit.3. As soon as I pay everything off, it disappears from my

credit report4. I have been approved; the bank has to honor its

commitment.5. I have already messed up my credit. Nothing I can do

about it now.

Credit Resources• Annual free credit report service– www.annualcreditreport.com

• Fair Isaac & Company – www.fico.com

• US Federal Trade Commission– www.ftc.gov

• US Federal Deposit Insurance Corporation– www.fdic.gov

• Internal Revenue Service – www.irs.gov

Credit Resources Cont.

• Credit Karma:– www.creditkarma.com

• SCORE.org – at website– Business Debt Relief Guide pdf– Visa Financial Management Workbook– Various SCORE Credit workshops & blogs

• SCORE St. Paul Mentors at:– www.stpaul.score.org

Thank You!