It’s important to build and maintain good credit reports. In addition, it’s now essential to monitor credit reports faithfully — especially with small agencies and entrepreneurs using increasing amounts of credit. Fred Dent warns you to keep up to date on the changes.
Did you know that more and more companies, banks, and individual grantors are using credit scores as a rating method? And, did you know that credit scores:
- Have varying standards
- Have been kept secret from consumers
- Can have a negative impact on your personal and professional reputation?
A Money magazine article explained how the five-year fight to give consumers access to their credit scores is finally coming to an end. According to the article, 'This mathematical gauge of your creditworthiness, which has long been kept secret from consumers, plays a part in everything from loan rates to insurance premiums.' Credit scores rate your credit history among the general population of credit users. Scores are calculated using a formula that’s held as close to the originator’s heart as the famed formula for Coca-Cola.
Many insurance carriers are using credit scoring to determine whether to underwrite both Life and Property/Casualty risks. Recently, an Allstate agent in Louisiana attempting to underwrite a Homeowners policy grew concerned when he was given a different rate for three individual prospects due to their credit scores. The agent was horrified.
The California state legislature required credit agencies to release credit scores to interested persons and firms. In response, a number of credit firms began selling not only credit reports but also credit scores. California had inadverdently created a new business opportunity even though the credit agencies/reporters opposed the idea and fought the process. Once the law passed, credit agencies watched the money pour in when they began charging for credit reports and scores.
Credit scores typically range from 600 to the 900s. The lower the score, the less desirable the risk. Underwriters are now making the case that low credit scores could increase the risk of loss. Also, credit scores don’t consider an individual’s net worth, accounts receivable if they’re a business owner, nor their ability to manage credit.
Three national agencies provide credit information: Equifax (www.equifax.com), Transunion (www.tuc.com), and Experian (formerly TRW) (www.experian.com). These agencies sell reports built from such credit providers as financial institutions, retail stores, and credit card companies. The problem is that in many instances the credit reports contain errors. In one particular case, 14 incorrect items on a credit report took more than two months to correct.
Also, a credit score is lowered each time one attempts to secure credit, or when a current credit grantor renews a note. The score is lowered on average by four points for each credit inquiry. Hence, if you’re looking for a more competitive home loan rate, your score will be lowered four points per inquiry. Search four or five mortgage companies or banks and your score can drop 16-20 points! The more you shop for better interest and terms, the lower your score — and the lower your chances of getting a decent interest rate. Talk about a catch-22!
Credit scoring companies such as Fair Isaac — one of the originators of the concept — make the case that the scores actually make credit available more quickly. Sounds good until you learn that small businesses use more credit than ordinary consumers.
You can purchase your credit report online by going to any of the three addresses above. Not all of them will sell you your credit score. But Equifax, in a relationship with Fair Issac Company, a major seller of credit information, will. Make sure you get both a copy of your credit report and your credit score and monitor them faithfully. The situation is getting so bad that a banker friend said recently, 'One can’t make a loan in our bank unless the bankers know how to manage the credit scores.'
Unreasonable credit ratings and scores are hampering such human qualities as character, capacity, and credit history that once enabled people to open small businesses.
Keeping pace with these technological changes is a challenge in today’s competitive marketplace. Meanwhile, consumers remain trapped in a credit score catch-22!