By Wayne Moseley
Personal credit history is viewed as a barometer or an example of the payment habits of the owners, stockholders, and/or officers. A company’s payment practices starts at the top usually with the president and/or chairman. If this individual has poor personal credit, then you may find your wheels spinning when the company needs money. A company will not get anywhere without officers and/or owners with good credit.
Not only does personal credit affect the cost of funds for mortgages and installment debt, but with today’s scoring systems it can literally make the difference on just how much you’ll pay. It can impact on whether your business grows or not and at the very least, on how fast your business gets the capital it needs to expand.
The three primary credit reporting agencies are Equifax (previously CBI), Experian (formerly TRW), and Transition (also know as, TRU). All three credit reporting agencies have scoring models based on payment history, revolving credit exposure, the percentage of credit available, and number of inquires on your credit report.
Do not cancel or close out credit cards; pay them off and even cut them up if you need to, but leave the account open so that the scoring model will pick up the available balance and score it up or down – relative to the amount of exposure. Too much revolving debt can have a real negative effect, even with over 50% available, which is a common threshold.
Good payment history on installment loans rate high, while liens, suits, and judgments will destroy your scores. So many times I have talked to people who have legitimate, valid reasons for these items, but they didn’t follow through to correct the information because they were “too busy;” not all got what they deserved, but all got what they earned.
Most collection agents are pretty tough. Follow their rules, but play their game to your advantage; send disputes in writing via certified mail to be safe and do what you agree to do. We live in an automated world and your personal credit score dictates what rate you get and ultimately, how much you pay. So stay in touch and write that letter; make the calls to protect your credit. It’s worth it and will save you time and money in the long run. Always get their agreement in writing, I cannot stress this enough. Don’t let being “too busy” effect your credit score and wind up costing you $20 to $100 a month extra in interest because of your current score. Too busy you say! Don’t disregard the debt based on principal, right or wrong, be smart, fix it now!
Current reported “lates,” either on installment or revolving credit, will adversely affect your score, especially a late mortgage payment; so be sure to make your payments on time. Business owners, be sure to compensate yourself enough to pay your personal bills and remit your business installment debts on time. If you must be late, pay your vendors late and explain; they’ll listen if you talk to them, but do not avoid their calls. Call them first and see how well it works to your advantage.
Regarding credit inquires, don’t get too proud over all those credit card offers or the good credit you have (or think you have), applying too often for anything. For example, don’t go to three auto dealerships and complete credit applications at each. First decide which car you really want, then check with your banks for their best offer, next talk to the automotive finance manager for the programs they have available, and then proceed from there. Too many credit inquires over a short period of time will negatively effect your credit score.
Business owners, do not put your social security number on a vendor or supplier application. Most vendor and suppliers will accept a small amount of risk to make their sales if the rest of your business attributes check out, such as a good bank reference with no returned checks, etc. On the other hand, all lending institutions will not even consider an application without a personal guarantee from the officers/owners unless the corporation is very large with many owners.
If you get turned down because of poor personal credit, immediately order all 3 credit reports. Fix the disputes or appeal to the creditor to reflect the best possible rating. Get a letter from the creditor stating what they’re going to do. Do not rely on a verbal statement from an employee who may not be there tomorrow. If you have their letter, you can fax it directly to the credit reporting agency to correct the error a lot faster than waiting for them to receive it from a “busy creditor”. Control your destiny, trust in writing only.
Stay tuned for the next part on “Business Relationship Banking”.
Wayne Moseley was the president of General Equipment Leasing and has many years of credit experience. For more information, contact Taylor Moseley, General Financial, at 813-505-6810 or visit gefinances.com.
[From Connection Magazine – November 2001]