Credit cleaners

| December 12, 2008

Good credit helps your business soar, but bad credit is a costly millstone around your neck. There are no quick fixes, but with careful financial maintenance, you can become a better risk to lenders — starting now.

Everyone knows that bad credit adds tens of thousands of dollars to the price of a truck or a house by increasing the cost of borrowing money.

Many people don’t realize, however, that credit scores are even more influential than that.
Insurers use them in setting premiums. Employers use them in making hiring decisions. Landlords use them in deciding whom to rent to.

An owner-operator with bad credit may get turned down by the fleet he hoped to lease onto. He may get turned down by a government agency when he applies for a loan to purchase a low-cost anti-idling kit. Military freight might never go onto his truck because the Pentagon or other shippers consider him a risk.

“Bad credit really costs you a lot more just to live,” says Elizabeth Schomburg, senior vice president of Family Credit Counseling Service, a nonprofit based in Chicago.

“Your credit is like your personal reputation. You can trash it in one wild weekend, and then it takes you years to live it down,” says Craig Watts, spokesman for Fair Isaac Corp. of Minneapolis, or FICO, which invented the credit score in the 1960s.

For example, at one of the three major credit bureaus, Experian, negative information stays on your record for seven years, and serious transgressions longer than that: a bankruptcy for 10 years, a state or federal tax lien for 15 years.

“The very worst thing you see from people in that bad-credit pit is procrastination,” says Chris Chiapetta, executive director of the National Credit Builders Association. “Once you go bad, you want to get started on changing things as soon as possible.”

Only two or three years of good payment behavior can make a positive difference in your credit score, which assigns more weight to recent acts than to older ones. “As time goes on, the mistakes of your past become less and less important,” Schomburg says.

If this sounds like a slow process, you’re catching on.

“The phrase ‘credit repair’ has become something of a curse word among regulators and lenders,” Watts says, because it implies a quick fix through Enron-style accountancy magic. You’re better off thinking of credit rebuilding as a painstaking process. “If it were that easy to do,” Watts says, “people wouldn’t have gotten into the bad-credit situation in the first place.”

Because all the data in your report boils down to your credit score, it’s easy to feel subjugated by this one number, which might not accurately portray your financial resources and money management skills. Nevertheless, Watts argues, such scores have greatly empowered consumers and small-business owners such as owner-operators.

Back in the 1960s, “if you wanted to get a loan, you pretty much had to know a banker personally,” Watts says. “If not, you had to hand over a mountain of personal information.”

Credit scores make the process much more streamlined and accessible, enabling information to be shared and accessed nationwide, so that individuals can get financing from multiple sources with much less effort, Watts says.

The downside, of course, is that your bad credit history is instantly accessible for any stranger to see, without you being present to plead your case. That’s especially troubling for a small-business owner, such as an owner-operator trucker, whose personal credit and business credit are indistinguishable in a single credit score.

What an owner-operator mainly has to present to a potential lender is himself, says Greg Conklin, executive director of sales for First Advantage Transportation Services, which tracks the credit of brokers and shippers. “You’re basically saying, ‘Believe in me, believe in my business.’ It’s going to hinge on your personal credit, and on your ability to take responsibility for your own actions.”

Self-employed people such as owner-operators sometimes want to show a loss at year’s end for tax purposes, but that negative net income looks bad to a lender, Chiapetta says.

When seeking a loan from a truck manufacturer, your local bank or the Small Business Administration, you can try to make clear to the loan officer the distinction between your business finances and your personal finances. Credit bureaus, however, don’t make that distinction; they just crunch the numbers.

The following steps are the most effective ways to clean your credit.

GET CURRENT
“Stop the bleeding,” Watts says. If you’re behind on any accounts, pay what you owe, including any penalties, as quickly as possible, even if it means living off Ramen noodles. “Be willing to make sacrifices,” Schomburg says.

Those sacrifices aren’t only financial. Simply admitting that you’ve made bad spending choices and that only you can make things right can be a daunting step, but no one can climb out of a bad-credit swamp without it.

Conklin, whose company tracks payment records of more than 3,000 brokers and shippers, deals daily with truckers who are justifiably angry because brokers and shippers don’t pay on time. Yet truckers behind in their own payments often don’t realize that they are, in their creditors’ eyes, no better than those brokers who get denounced at every truck stop, Conklin says. “If you look at it from that perspective,” he says, “you’ll be more prompt about paying off your own obligations.”

PAY PROMPTLY
Once you’ve settled past-due amounts and penalties, make sure you never get a past-due notice again. That’s true not only of truck and mortgage payments, but of anything with a due date.

Make a business budget and a household budget and stick to them. Plan realistically not only for known business and personal costs, but also for the inevitable emergencies.

Hiring a business services provider to help you through the budgeting process can be money well spent. If you don’t have someone at home to keep track of the bills while you’re on the road, get your bills sent to you via e-mail, and set up automatic bill payment from your checking account whenever possible.

On rare occasions, if you have a good payment history with a particular creditor and a good reason for knowing you’re going to be late with the next payment, a timely call to that payment office might earn you some grace time without a penalty or a report to the credit bureau. “You can’t do that all the time, of course,” Schomburg says, “and they’ll tell you, ‘Don’t do it again.'”

LOWER BALANCES
The ideal is to pay off each credit card monthly so that you aren’t charged interest on any balances carried over. But even if you can’t manage that yet, try to lower your balances on each card to no more than half the card limit, because a maxed-out card is a monthly drag on your credit score. “If your card has, say, a $10,000 limit, then from the lender’s perspective, your using $8,000 of it is riskier than your using $5,000 of it,” Schomburg says. Maintaining less than 17 percent of your debt limit is considered being paid off, while being at more than 84 percent of your debt limit is considered maxed out, Chiapetta says.

Some people never have missed a payment in their lives, never even have carried over a credit-card balance month to month, yet still have low credit scores because they run up high balances each month that approach their credit limit, Watts says.

“They pay down to zero each month and feel quite frugal,” Watts says, but from a lender’s standpoint, they’re dancing on the brink each month. “Remember that we have no idea, in calculating these scores, how much wealth they have,” Watts says. “All we have to go on is what percentage of the credit limit they’re using.”

Every 30 to 60 days, Chiapetta asks for a credit increase on the cards he regularly uses. If your spending habits stay the same but your debt ceiling keeps increasing, then your credit standing with that lender is increasingly good, he says.

LIMIT INQUIRIES
Credit inquires can be either “soft pulls” – when you check your credit report for personal reasons – or “hard pulls” made by potential lenders, Schomburg says. It’s those hard pulls that can erode your credit if too many are made.

The average American makes fewer than two credit applications a year, so if you do even three in a year, you’re calling undue attention to yourself, Watts says.

This does not mean, however, that you shouldn’t shop around among multiple lenders for the best rate on a big purchase such as a new truck. That’s an excellent business practice, and your credit score allows for it, Watts says: Such a purchase forgives all related credit inquiries made during the previous 30 days.

On the other hand, if you keep getting turned down by lenders in rapid succession, “your risk goes through the roof,” Watts says.

For people in such a situation, title loans, “payday loans” and other loans that target people in financial straits seem very tempting. “If you don’t pay them off immediately, you soon could be paying interest of several hundred percent, or even a thousand percent,” Schomburg says.

If you and your accountant realize you’re not eligible for a loan at a rate you can afford, don’t repeatedly drive into the “no” wall nor take out a devastating storefront loan. Instead, make the difficult changes in your habits that will make you a better credit risk.

BE CHOOSY ABOUT CARDS
Never take out a new line of credit frivolously, Watts says. Say no when the department store cashier offers you a credit card so you can save 10 percent on that day’s purchase, Watts advises. It’s not worth the tug on your credit and the long-term expense.

Ignore those credit card offers you get in the mail, too. “The people who get the most offers are the ones the credit card companies think will make them the most money by not paying off their balances every month,” Watts says.

Your ideal ratio should be one credit card for each installment loan and up to five cards, Chiapetta says. That means your truck loan, for example, “earns” you one credit card, your mortgage a second credit card, and so on. If you stick to this ratio, Chiapetta says, you’ll be much better off than the average American, who has 14 credit cards.

Keep in mind that lenders like to see a “healthy mix” of credit in your portfolio – not just credit cards, but also mortgages, truck and auto loans, fuel cards, department store cards – rather than too many of any one type, Schomburg says. If you genuinely are in the market for a new card, she advises that you carefully look at all the fine print, including the interest rates and annual fees and how those will go up after the initial grace period.

On the other hand, if you have a credit card that you barely use anymore, don’t be too quick to close it out. Its mere existence provides a boost to your credit score, 15 percent of which depends on the length of your credit history – in other words, how long you’ve been someone’s good customer. “Instead of closing that old account, use it once a month for a tank of fuel or something, pay it off immediately, and keep enjoying the benefit,” Schomburg says.

DON’T CO-SIGN
“Signing a loan is a business decision, and you shouldn’t allow it to be overcome by emotion,” even if you’re trying to help out a close friend or relative, Schomburg says. In many states, if the primary borrower misses payments, the creditors can turn to the co-signer for satisfaction.

“When you sign your name on that dotted line, you are putting your name at risk,” Schomburg says. “The creditors can come after you, and they have every legal right to pursue action against you,” even to the point of demanding your truck or house.

SHUN THE B-WORD
Bankruptcy laws are much more strict than they used to be, but even if you’re eligible to file, remember that bankruptcy will be a black mark on your credit for a decade, Schomburg says.

Given the expense of a new truck, or even a used one in good working order, a bankruptcy can put an end to a trucker’s owner-operator dream. If you’re paying off your debts via Chapter 13 bankruptcy, you can’t even buy a new truck without permission from the trustee, Chiapetta says.

CHECK YOUR CREDIT REPORT
Experts agree that it’s crucial to know your current credit, whether or not you’re in financial trouble or planning a big purchase. “When you get your credit report, go over it carefully,” Watts says. “It’s always an education.”

Federal law now guarantees you one free copy of your credit report per year from each of the three major credit bureaus: Equifax, Experian and TransUnion. You don’t need a fee-charging service to act as the middleman. Just go to this site and request a report yourself.

Financial experts recommend requesting a report from a different bureau every four months. That way you get a frequent look at it at no cost.

“And if you’re in the process of cleaning up your credit, you may want to check your report more frequently than three times a year, even if you have to pay for it,” Chiapetta says.
The credit report is the raw data used to calculate your credit score, but to get a copy of the score itself, you have to pay a fee, $5.95 to $7.95, to one of the credit bureaus or MyFICO.com. If you’ve already got your recent credit reports, Chiapetta sees little benefit to having the numeric score, other than curiosity.

GET CREDIT ERRORS FIXED
“About 90 percent of credit reports have errors, ranging from serious cases of identity theft to simple misspellings,” Schomburg says.

You need to make sure that bad items come off when they’re supposed to come off, Chiapetta says. Even the simplest errors need to be pointed out as soon as you spot them, using the instructions included with the report.

That process sometimes requires the perseverance of a heavy haul on a long upgrade. “The bureaus will tell you that typically it takes less than 10 days to correct an error, and that’s probably true for the easy ones,” Watts says. Start with a detailed e-mail explaining the problem; from there, the bureau will ask for documentation, “and the more persuasive your documentation, the better,” Watts says. “Then the dance has started.”

The bureau will share your documentation with the lender, which usually is sufficient to get the information corrected. Only if the lender simply reaffirms the wrong information should you then start pressing your case more aggressively and possibly getting legal help.

A long-forgotten, decades-old bad debt from your misspent youth can show up without warning on your credit report because the dormant account just was bought by a collection agency, Chiapetta says. The law says you’re due a notification beforehand; if you didn’t get fair warning, he advises, challenge the item.

The perseverance of clearing errors pays off, Schomburg says. “The point is to make sure you fix it before you need it.”

USE WHAT YOU SAVE
Once you’re current on your truck and mortgage payments and have paid off your credit-card debt, you’ll have extra money each month that’s no longer being spent on interest and penalties. Be proud of that money; in a sense, you’ve earned it twice over, both behind the wheel and by doing the hard work of climbing out of debt.

Show your pride by not wasting it or letting it trickle into the sand of day-to-day expenses. Instead, Schomburg says, put this “found money” into your emergency fund or your retirement savings, or invest it.

All this may seem like common sense, but as the French philosopher Voltaire said, “Common sense is not so common.” And some owner-operators who are struggling with bad credit may need to think of themselves less as cowboys or lone wolves and more as accountants.

People with top-flight credit tend to be “rather boring money managers,” Watts says. “They stick with a few credit instruments for many years and always pay off the balance and never miss a payment, ever. They aren’t very interesting to write about, but when they need credit, they have no trouble getting it.”


KEEPING SCORE
Your credit score is a three-digit number that attempts to quantify the risk you present to a lender. The higher your credit score, the lower your risk. The lowest possible score is 300, the highest 850.

700-850: You’re in good shape, and keeping company with half the U.S. population. Any score over 700 is as good as 850 for most lenders.

600-699: You might or might not present a good risk, depending on the amount and nature of the loan, who the lender is, how the economy is doing and other factors.

300-599: You might not qualify for credit. If you do, it’ll cost you.


PLAYING YOUR CARDS RIGHT
If you have multiple credit cards with balances on each, how do you decide which to pay off first?

Family Credit Counseling Service recommends a “roll-down” method: First, make sure you’re paying the minimum on each card each month, so that you don’t incur penalties. Second, any payments made over the minimum should be concentrated on the card with the highest interest rate because it’s costing you the most. When that card is paid off, start whittling down the balance with the second highest interest rate, and so on.

Elizabeth Schomburg of FCCS notes that some people get a psychological boost from picking the low-hanging fruit, and quickly paying off the card with only $300 on it before tackling the harder stuff. If so, go for it, she advises – but first, make sure you’ve calculated how much that higher-rate balance really is costing you each month, and how long you can afford to let it fester.

If two of your cards have equal interest rates, pay down the one that’s closest to being maxed out. Remember, while that rate is of great importance to you, the credit bureaus don’t care about it; they care about how close you are to your credit limit.

Another avenue is to consolidate your credit card debt onto one card, if you can find a card that will enable you to do that without costing more in the long run. MyFICO.com offers a free online calculator that can show you whether such an offer really is a good deal.

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