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Archive for the 'Personal Credit' Category
Does A Car Lease Affect My Credit?
September 12th, 2008
Here’s a question from a reader:
Does signing a car lease and making those payments impact personal credit in any way? The short answer is, “It may.”
If the car lease is a personal lease, and is reported to the credit reporting agencies (most are, but not all), it will affect your credit. Whether it helps or hurts depends on all the other information in your credit report. If you already have a lot of debt and payments, then it could be negative. If not, it may be a positive.
Even if the lease doesn’t impact your score much, it can affect your credit in other ways. I recall one entrepreneur, for example, who was charged a higher rate for her mortgage due to an expensive car lease payment that appeared on her credit report. Except it wasn’t hers. When she got it removed, her interest rate improved.
If the vehicle is leased under a business lease, and does not appear on your credit report, then it will not affect your personal credit.
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In Credit Crunch, Business Comes First
September 8th, 2008
Business owners are electing to pay business debts at the expense of personal debts, reports Experian(tm). In a comprehensive study covering 2.7 million business owners over the course of a year, the global information services company found that found that business owners with a severe mortgage delinquency were more likely to pay their business obligations instead of their mortgage.
Experian’s research showed that because of deteriorating equity, high mortgage payments and limited refinancing options, business owners chose to ensure the business’ survival, preserving their source of income at the risk of losing their home. That’s the bad news.
Here’s the good news:
Business owners were less likely to experience a 90+ day delinquency on their mortgage than other consumers. In fact, by April 2008, the average home owner was 1.5 times more likely to experience severe mortgage delinquency than the average business owner
Additionally, Experian’s study found that small-business owners are relying on commercial lending options more often than personal financing options, to support their businesses. We think that’s smart business and it may very well allow the business owner to keep their business even if they have to start over personally.
But of course, the downside is that business owners’ personal credit can impact their business financing. Experian, which sells a credit score that blends the business owner’s credit with the credit of the business, points out that consumer scores work great for assessing consumer risk, but their blended score performs nearly twice as well as a consumer score for assessing business risk.
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I’m Skeptical About Building Business Credit
August 25th, 2008
I read your site about building business credit to obtain loans. I donʼt believe it works. I build a perfect business credit with DNB and intermediate credit with Experian. However, it all goes back to personal credit. Additionally, I know for a fact that you cannot obtain a unsecured line of credit with business credit. They only work with FICOʼS of 680-700. So, what makes your program different than others? I tried and seen all other companies saying the same thing and I end up paying a lot of money. Please let me know your thoughts.
Thanks for giving us the chance to respond to your question. It’s pretty clear you’ve had some really bad experiences in the past. We get frustrated, too, by all the ads that promise hundreds of thousands of dollars in unsecured business credit lines virtually overnight even if your credit is terrible. It just doesn’t work that way.
There are many things that figure into a business loan besides the credit scores (personal and business) including:
- How long your business has been established,
- The type of business you are in (try getting a loan for a construction company in many parts of the country today and you’ll get laughed out the door),
- What you plan to use the money for,
- The growth prospects for your business,
- Your track record in your field.
At the same time, we believe strongly that personal and business credit go hand in hand, and you cannot ignore the personal credit side of the equation.
That’s one reason why, in our program, we work with serious entrepreneurs over the course of a year. We know it takes time to set things up correctly, and that your willingness to do what it takes to get your business to the next level is a major indicator of your success. We’ve found, for example, that many entrepreneurs have personal credit issues because of the amount of revolving business debt they carry on their personal credit. We actively work with these business owners to establish non-personally guaranteed, non-reporting business credit cards. A business owner can then shift their business debt to these cards and dramatically improve their personal credit and access unsecured lines of credit and other financing.
Finally, I would encourage you to remember that unsecured lines of credit aren’t the only types of business credit that are valuable. I recently obtained a line of credit for computer equipment. No personal guarantee was required and the loan will not report on my personal credit. In addition, as I pay it off on time I am helping to protect my business cash flow while building a business credit reference. I consider that a win-win.
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Credit Investors: Partnering For Personal Credit
July 18th, 2008
By The XBanker
Like it or not, your personal credit will open or shut doors for financing your business. If you have terrible personal credit, we can help you obtain trade credit, credit cards, equipment leasing and potentially some bank financing. However, we can obtain much more financing, if a business owner has great credit (preferably 700+ FICO). This has important consequences for you, if you are trying to finance a business and have poor personal credit. You need to consider bringing on a credit investor or partner that can help you obtain bank financing for your business.
Last week, I asked an entrepreneur about his loan readiness and he told me his credit was in the toilet. So I turned to his partner, “My credit is even worse,” was his reply. I guess when it came to selecting partners, this criteria slipped their minds - don’t make the same mistake. Unless a partner brings irreplaceable technical expertise, they can always be replaced with someone that brings skills and credit to the table.
If you’re an entrepreneur with poor personal credit, you should consider bringing on a credit investor or partner. Ideally, you’ll need someone with 700+ FICO scores and good ratios (feel free to ask one of our consultants to do an analysis of a potential partner before you tie the knot). You may have better luck finding an investor or partner with good credit, than finding one with cash.
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What Does a Personal Guarantee Mean?
May 26th, 2008
Sometimes when you are close to a subject it’s easy to forget that what is obvious to you may not be so obvious to someone outside the industry.
Case in point: personal guarantees.
For most people the meaning of the term “personal guarantee” is pretty obvious – you agree to personally be responsible for the repayment of the loan. It is usually used in a business sense: a business owner who signs a personal guarantee for a business loan is agreeing to be personally responsible for the loan if the business does not repay it. The term is not usually used in the context of personal loans because when you sign the note for the loan you are implicitly providing your personal guarantee. But it’s there.
We were pretty surprised and confused, then, when Entrepreneur recently published an article that muddied the waters. In “Nothing Personal: How can you protect yourself and your assets from risk when securing a business loan?” author Rosalind Resnick replied to a reader who was asking about how to find non-recourse loans that do not require the borrower’s personal guarantee.
The first part of her answer was fine, although I may have started out by explaining the difference between non-recourse loans and personal guarantees to make sure the reader understood what those terms mean. (A non-recourse loan is typically a secured loan in which the collateral can be repossessed, but the borrower is not personally liable if he or she defaults.)
However the second part of the article was just, well, wrong. There, the author described Prosper as an example of a service that facilitates loans that “don’t require personal guarantees.” Huh? Take a look at the sample promissory note provided on the Prosper website. A borrower is most certainly agreeing to guarantee repayment personally. (You wouldn’t get too many lenders if the loans didn’t carry a personal guarantee.) And Prosper reports all loans on borrower’s personal credit reports (not just loans with late payments as the article implies). How could they report to the loans on the borrower’s personal credit if the borrower wasn’t personally guaranteeing the loan?
Here’s where it gets bizarre.
My colleague Luke Adams, who has been both a Prosper borrower and lender, pointed out the error to Entrepreneur magazine, which then contacted Prosper. In an email exchange between the editor and Prosper, the Prosper representative told Entrepreneur that the loan did not require a personal guarantee because no collateral was involved.
Again, terms that seem obvious are getting mixed up here. Whether a loan is secured (collateral) versus unsecured (no collateral) has nothing to do with a personal guarantee. While I couldn’t find a formal definition of personal guarantee on the SBA website (I guess they assume everyone knows what it means, too), I did find this reference which clearly distinguishes between personal guarantees and collateral as separate and distinct loan terms.
Don’t get me wrong. I love reading Entrepreneur magazine and I won’t cancel my subscription over this. I also think Prosper is one of the best innovations in lending I’ve seen in my 20-year career in consumer credit education. (Though my fingers are crossed that they will develop a true business loan option.)
But in the meantime, if you are looking for a business loan with no personal guarantee, make sure you’re getting the right advice.
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Can Boosting Personal Credit Scores Boost Business Credit Scores?
May 12th, 2008
Business owners who raise their personal credit scores may see a change in their business credit scores, and vice versa since both are closely linked, according to the results of a study by Experian®, a global information solutions company. This is a reminder of why it is so important for entrepreneurs who want to get small business loans to work on both their personal and business credit scores to maximize both.
Experian compiled a sample of more than one million small business owners for this study, defining a small business owner as the CEO, president or proprietor of a business having 25 or fewer employees.
When the numbers were sliced and decided, they found that small-business owners possess unique characteristics that set them apart from the rest of the consumer population. The study also indicated that there is a distinct correlation between a small business owner’s personal credit score and their commercial credit score. Experian says this indicates that a blended scoring approach (which they offer) would give companies a more predictive view of a small business’ creditworthiness and risk.
A sample of the study’s initial findings include:
· Small business owners have a 21 percent higher income than the general population, and are more likely to reside in higher-value homes (!!)
· Small business owners are slightly younger then the overall national average, and have longer lengths of residence.
· Forty-two percent of small business owners are more likely to be married than the national average. Twenty percent more likely to live in male-headed households, 25 percent more likely to have children and 11 percent more likely to be homeowners.
· Small business owners have higher education levels across all education attainment categories, and are more likely to donate to causes than the overall population.
· There is a significant positive correlation between the consumer credit score and the commercial credit score. Thus, positive changes in one score frequently are associated with positive changes in the other score. Conversely, negative changes in one score frequently are associated with negative changes in the other score.
So hopefully you’re not buying the snake oil salesman’s pitch that you can completely ignore your personal credit score if it is the dumps and just build business credit. Both are essential!
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Tips for Boosting Your Credit
April 21st, 2008
Many consumers are looking for the fairy godmother of credit, who will wave her wand and make their bad credit disappear. But building better credit isn’t magic.
I’ve been watching the consumer finance industry for 18 years now, and I’ve never seen it so tough for consumers. It’s almost as if consumers have to walk through a “minefield” of traps to keep up, much less stay ahead. One wrong move, and your credit score drops like a rock, your interest rates jump to the stratosphere, or you’re dragged into arbitration where you’re virtually bound to lose. I see it all the time.
The better your credit rating, the more money you’ll save and the stronger your negotiating power. So let me give you some essential tips for maximizing your credit rating and saving money. (I am assuming you’ve already received your free annual credit reports If not, order them right away.)
Tip #1: Don’t close old accounts! I’ve said it before, and I’ll say it again. You’re bound to see some old accounts listed as open though you don’t use them anymore. FICO says that closing old accounts won’t help your credit rating and can only hurt it. Think having too many open accounts hurts your credit? Think again. My colleague Scott Bilker of DebtSmart.com has 83 open credit cards and a credit score of over 800 – which is excellent!
Tip #2: Watch your debt levels. If you’re using more than 30 – 50% of your credit cards or home equity lines of credit, your credit score may take a hit. In fact, Experian says that consumers who use more than 50% of their available credit have Experian Plus Scores of 633 versus a national average of 677.
Tip #3: Check the Credit Limits. Some issuers don’t report credit limits for competitive reasons. But this can hurt your credit score. Without a credit limit, the FICO score will substitute the highest balance ever reported, which is likely much lower. This can make you look maxxed out, even on cards you pay in full! Complain to the card issuer, and if they won’t report the limits, look elsewhere.
Tip #4: Don’t Cosign. I’ve heard so many stories from consumers who have been burned by cosigning. Even if you cosign a loan and it’s paid on time, it likely will still be reported on your credit report and count against you as if it were your own debt.
Tip #5: Stay On Top of It. Identity theft, credit fraud and credit report problems are rampant. I receive complaints every week from consumers who have discovered mistakes or problems with their credit reports. And every week I read new stories about security breaches that have put consumer’s personal information at risk. It’s no longer enough to check your once a year – you must stay on top of your credit and financial accounts.
Think about it. What will you do if someone cleans out your bank account…or runs up hundreds of thousands of dollars of debt in your name…or even hijacks your health insurance policy? You’ll quickly be living a nightmare.
You may think that avoiding online transactions is the best way to protect yourself from ID Theft. But the Better Business Bureau says the opposite. In fact the BBB recommends consumers monitor their financial accounts online and use electronic alerts to notify them of important activity like transfers, or low balances. They also suggest consumers use online statements and pay bills online as well.
A report by the Better Business Bureau and Javelin Strategy & Research says that id theft victims who monitored their accounts online experienced losses one-eighth of those who relied on paper statements to detect the crime.
Tip #6: Clean Up Common Mistakes. One in four credit reports contains mistakes serious enough to get you turned down for credit, a loan, an apartment, home loan or even a job, according to a report by the Public Interest Research Group. Over the last decade, the state PIRGs and other consumer organizations have issued numerous reports showing that credit files frequently contain mistakes.
The PIRG study found that 79% of the credit reports studied contained mistakes of some kind, 25% of them serious errors. In just over half of the reports, personal identifying information was misspelled, long-outdated, belonged to a stranger, or was just incorrect. Add to that the growing problem of credit fraud and identity theft, and you can’t be sure your credit report doesn’t contain costly mistakes. The only way to make sure it’s correct is to review it. Mistakes can happen at any time, to anyone.
Now here’s the important part. What do you do when you find mistakes? Federal law gives you the right to dispute mistakes on your credit report. The credit bureau or creditor must get back to you within thirty days with the results of your investigation. But be careful.
You need to be smart about how you handle disputes. For example, you should always send your disputes by certified mail and keep a record of all correspondence. Dispute items with both the creditor and the credit reporting agency for maximum results. Also, get good advice before you pay off disputed accounts or old collection accounts, or you may make costly mistakes.
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Truly Free Credit Reports
April 18th, 2008
Here’s how to really get free copies of your credit and consumer reports (including a few agencies you may not know about).
There are three major national credit reporting agencies that collect and sell reports about consumer’s financial habits. There are also national specialized consumer reporting agencies that are required to provide an annual free disclosure to consumers. Since these may collect and report different information, it’s a good idea to review all of them at least once a year.
To order your free annual credit report for Equifax, Experian or Trans Union, go to www.AnnualCreditReport.com or call 1-877-322-8228. The reports are free, credit scores are not.
Chexsystems and Telecheck both report on bounced checks and overdrawn bank accounts.
Choicepoint provides several types of consumer reports:
C.L.U.E. reports relate to insurance claims. Get a copy at www.ChoiceTrust.com or call 1-866-312-8076.
To request a copy of your employment history report from Choicepoint, call 1-866-312-8075.
To request a copy of your tenant history report from Choicepoint, call 1-877-448-5732.
MIB reports information related to applications for life, health, disability, or long-term insurance. Visit www.MIB.com or 866-692-6901. Note, if you have not applied for for individually underwritten life, health, or disability insurance during the preceding seven year period, MIB will not have a record on you.
One question I am often asked is whether it’s a good idea to stagger your requests for your free credit reports. In other words, order one from one bureau in January, the second in a few months, etc.
My answer is, “Absolutely not.” These agencies do not share information with each other and a mistake may show up on one report but not the others. If you don’t know about it, you can’t fixe it. It is essential you check them all right away. If there is a problem, or you want more frequent access, order a credit monitoring service.
Have fun!
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Can you remove credit inquiries?
April 15th, 2008
“How can I remove inquiries off my credit report?”
It’s a common question I hear and here’s my take.
When someone reviews your credit, the credit agency lists an “inquiry” on your credit report. There are two types of inquiries: soft and hard. Soft inquiries are shown only to you, when you receive a copy of your credit report. They do not appear on credit reports sold to lenders. Soft inquiries are created when your credit report is included in a review for a “preapproved” credit card, when one of your current lenders reviews your account (perhaps for a credit line increase or an interest-rate increase), or when you access your own credit report directly through a service that allows consumers to review your credit report. These inquiries do not count against you when you apply for credit and are not included in a credit score because no one sees them but you.
Hard inquiries are created when you apply for credit, insurance (most property insurers now use credit report generated Insurance Bureau Scores) and even some jobs.
In an effort to avoid penalizing consumers for shopping for mortgages and car loans, Fair Isaac Company (the ones who create the popular FICO scores and sell a majority of the scores to lenders and credit bureaus) created a policy that all mortgage-related inquiries, and separately all auto-related inquiries in the most recent 30-day period before the score was created count as a single inquiry. Going back before the most recent 30 days, all mortgage-related inquiries or auto-related inquiries within a 14-day stretch are treated as a single inquiry.
But here are the caveats. It only works if the inquiries can be clearly identified as mortgage or auto-related, it only applies to companies using FICO scores (a few use others) and it only applies to companies using more recent FICO software to generate their scores.
If you are shopping for credit, and you fill out a bunch of applications, your credit report will be affected. How much?
Contrary to what you may have read elsewhere, there is no standard point reduction for an inquiry. You can’t say, for example, that an inquiry lowers your score by 7 point or 9 points, for example. It depends on the mix of information in your credit report.
Inquiries can account for about 10% of your score, so it’s not a major factor, but it does count. We will see clients who have been trying to establish credit, and have applied in all the wrong places. Their credit files show multiple inquires, and their score has dropped as a result.
Inquiries remain on your credit file for two years. Can you remove them? Maybe, but it’s tough. If you are a victim of identity theft, you should try to get them suppressed so they don’t affect your credit scores.
As with many things, an ounce of prevention is worth a pound of cure. So don’t apply unnecessarily for credit when you aren’t likely to qualify! Keep those score-lowering inquiries to a minimum.
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