- Written by webmin
- Published: 14 Sep 2010
It’s safe to say that everyone understands the importance of credit. In today’s business environment, it’s virtually impossible to make progress without it. But even though we know how important it is, too few people know how it works.
Credit is complicated and it’s based on many things. Gaining a better understanding of how it affects you — and how a banker or lender uses your credit record to make a loan decision — is an important step toward painting a better financial picture for yourself, both personally and professionally.
Lesson No. 1 – Credit: Make It Personal
Greg: People think that their personal credit doesn’t affect their commercial credit. But if you don’t keep your personal credit clean, as a banker I’m not interested in extending you any commercial credit. I realize that there are dentists out there whose kids need braces and I know there are even bankers out there with bad credit. But from where I’m sitting, if you don’t keep your personal credit clean, there’s no reason for me to believe that you’ll keep your commercial credit clean either.
So one of the first things that I do is look at someone’s individual credit report. If it’s not any good, I won’t even look at the commercial credit application. It just isn’t worth it to me.
Ron: A lot of people don’t think about that. They think they’ll just start a corporation or maybe use an existing corporation. They probably know that the credit reporting for corporations is very thin, and isn’t nearly as reliable as it should be, especially for small businesses. As a general rule, banks don’t make loans that aren’t guaranteed. And in this case, the credit is only going to be as good as the owner’s credit. So those who think that they’ll be able to use business credit or new credit to get a good credit score aren’t going to get anywhere.
But that brings up a good question — what does a banker consider to be good credit? What’s a good credit score?
Greg: That changes all the time. It used to be that 700 was a great score; now 800 is considered great. Credit scores go from 300 to 850, and the highest score I’ve ever seen is 820. When I look at a credit report, the first thing I look at is the score. In my case, it isn’t the only thing, although as we’ve talked about, big banks do use credit scoring: If your number falls into the right category, you get the loan. If it doesn’t, you don’t get the loan.
But that’s a big bank. Bankers at smaller or independent banks are more flexible, because we know that there are many things that can lower your credit score.
Let’s say you go car shopping over the weekend; they’re going to run your credit scores. Every time you run those, it lowers the person’s credit score. So, knowing that, I’m not going to base my decision just on a credit score (note that in some cases with repeated requests for the same type of product in a given number of days, the number of hits is consolidated).
Instead, I’m going to look for a lot of the things that drive that score. I’m going to look at things like, do they have any charge-offs, or do they have any foreclosures? If I see a bankruptcy or a charge-off or repossession, that’s a deal-killer for me.
What’s surprising, though, is that I’ve seen credit scores in the 700s that had a repossession!
Ron: I think credit scores have become a moving target in recent years. They were stable until about mid-2008 and then, because of the financial meltdown, that all changed. I think the whole landscape has changed.
I don’t necessarily agree with you about 800 being the new standard for a great score. Don’t get me wrong, I think a score of 800…