fit-biz4u.com Blog

Recently, I was asked to review financials for a client’s new business. They told me that they made $100K per year. When we got their tax returns, the self-employed business grossed $47K and netted $21K. They also had very bad credit, which they neglected to tell me.

Did they think I wouldn’t find out?

When I questioned them about the differences, they told me that their “real” income was $100K and that much of it was cash under the table. My standard response to that is “our banks feel if you’ll lie to the IRS about how much you make, then it’s equally likely you’ll lie to us.”

When looking for funding, always tell the truth, even if it’s difficult.

Okay, last post on this topic – I promise.

Improving your score.  First, there is no magic bullet.  Credit scores are improved best by prompt payment history over time.  Here are some tips to improve your score from www.myfico.com.

1.  Check your credit report.  You don’t know what’s wrong until you know what’s on it.

2.  Pay bills on time.  Sounds trite, but it’s true.

3.  Reduce debt you owe.  Especially credit cards.  The lower the balance, the better.  Cancelling your credit cards can hurt your score because the score model looks at percentage of credit card debt to available.  For example if you have 10,000 available on two cards and a $5,000 balance you have 50% available.  If you cancel one of those cards and now have a $5,000 balance and $7,500 total available you only have 33% available and that hurts your score.

4.  Get current and stay current.  Older accounts with problems hurt you less than newer accounts with problems (but problems are still problems and stay on your credit report for 7 years except bankruptcies and foreclosures which stay 10 years).  The more you are current the better your score.

5.  Pay off debt rather than moving it around.  I hear lots of people open new cards to get a teaser rate and transfer debt.  This hurts your score and for most people leads them to increase their debt.

6.  Watch inquiries.  Don’t do lots of inquiries spread out over a long period of time.  If you are buying something like a car, keep the credit inquiries few and close together (a day or two).

Lets say you have a dispute over an error.  

Write a letter to both the credit agency and the company you have the dispute with.  Here is a sample of the letter’s format: http://www.myfico.com/CreditEducation/Rights/SampleLetter.aspx include copies of documents that prove the error (not originals).  Make sure you keep copies of the letter you send and the date.  Expect that it will take 30 days or more for anyone to respond.  Be prepared to follow up, be persistent but not pushy or angry.  The credit agency is required to investigage the issue and render a decision based on their understanding of the facts.  If their decision does not go your way, you can have a statement put on the credit report that you disagree with the item on your credit – this may cause some lenders in the future to contact you and get your side of the story.

So that sums up credit.  Remember, it’s your credit not the credit agencies so it’s your responsibility to make sure it is as good as you want it to be.

So let’s say your debts are overwhelming you and you’re looking for help.

First, the ads on TV and the internet about improving your credit are not by wonderful people who want you to be debt free – they are by companies who want to make money off you. That is the only reason they spend thousands of dollars on television ads. Even the companies that are non-profit are not necessarily acting in your best interest

The way many of these companies lower your debts is they take over all your accounts and threaten your lenders by telling them if they won’t accept less money, you’ll file bankruptcy and they’ll get nothing. The credit counseling agency negotiates a lower payment, charges a fee on top of that and you pay a combined balance.  However, what your original lender does is write off the loss and list it on your credit report as a Charge Off – which hurts your credit more.

Even the very fact that you are using a credit counseling company can show up on your credit and is considered a negative mark.  It’s important to think carefully about the long term ramifications to your credit score as these items stay on your credit for 7 years  and bankruptcies and foreclosures stay on for 10 years.

For more information on credit counseling agencies and getting the best advice for your personal situation, go to http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.

In this installment I wanted to talk about what goes into a credit score.  As mentioned before, there are many companies that provide credit scores.  We’ll talk about the FICO score because that is the most common.  Even with FICO they have about 15 different scoring models that they use to predict different things.

The basic FICO score is attempting to evaluate how likely it is that an individual will pay their credit obligations based on how other people with similiar information behave.  FICO analyzes thousands of variables to come up with a number somewhere in the range of 300 to 850 (higher is better).  These variables breakdown into five basic categories:

 As you can see, it’s not just about how you pay your bills.  Each of these five areas have many subsets that come into play.  For example payment history includes the number of obligations you pay on time, severity and length of any problem accounts, how long since you had any problem accounts and on payment issues depending on the type of accounts (credit card, auto, mortgage, retail, student loans, etc.).

All of these factors weigh together to create your credit profile.  What statistics that go into algorithm that makes your credit score is a closely guarded secret, which is controversial because you don’t know how it’s made up and it is something can affect you greatly.  FICO says that things that DO NOT go into creating your FICO score are race, age, color, religion, national origin, sex and marital status.  That doesn’t mean that lenders who are granting you credit may or may not consider some of those items.

For more information about your credit score you can go to http://www.myfico.com/crediteducation/articles/.

On the next (last?) article on credit we’ll talk about how to improve your score the right way and pitfalls to watch out for.

I’ll touch on credit scores in this installment. Ever see the commercials on television about getting your credit score? Normally with a cute jingle and funny story?  Here’s a hint, if they are advertising getting your score for free – their making money off you. Most of those ads give you a credit report for free – but only if you sign up for a monthly monitoring so it’s really not free.

Credit scores are confusing.  As we spoke about before, credit agencies gather information about you. They assign values to that data - your credit score. In fact there is no one credit score, but many based on the needs of companies who buy data about you. As an example, insurance companies looking to evaluate your risk of accidents will consider different factors than credit card companies will.

If you contact a credit agency and purchase your credit report with a score, you’ll generally get a different score than a lender recieves (here’s my special rant; in 21 years of financing I have found that the credit agencies ALWAYS gives the customer a better number than they provide to a lender. I can’t tell you the number of times that a customer comes to me with a 705 credit score and when we check their information, the score is 50 points less).

Rather than sign up for monitoring of your credit (for lots of reasons, I think it is bad idea), you can get a copy of your credit report from www.annualcreditreport.com. This is sponsored by the Federal Trade Commission and is legit and really free. It won’t give you a credit score, but will let you know what’s on your credit report.

In future issues, I’ll talk about what makes up a credit score, how to deal with bad information and how to improve your credit.

This is one of the most important topics for anyone looking for business or personal financing and I’ll do a couple of small pieces on this subject. First, some background:

There are companies that make a profit by gathering and selling information about your payment habits; these are called credit reporting agencies. The big three are Experian, Equifax and Transunion.  People often think that these entities exist to help the us. That’s not true. These companies exist to make a profit by selling information about you to other companies. They sell the information so their buyers will consider granting you credit, try and sell you something, or to help them collect on your debts. Until you understand what your needs are and what the credit agencies agenda is, you are operating at a disadvantage.

They are gathering information about you – but it’s your information. So you have a responsibility to ensure that the information they gather about you is accurate. Dave Ramsey in his book Financial Peace http://www.daveramsey.com/bestsellers/home/ says that 52% of all credit reports have errors in them. If you don’t understand how that effects you, you lose.

It’s the tail and the dog theory. Someone’s going to do the waggin’ and someone gets wagged. If you don’t decide you’re the dog, then you’re automatically the tail.