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.”

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