New Jersey Enterpreneur - Small Business, Entrepreneurs and Venture Capital

As an entrepreneur you will need to borrow money from your bank at some point in the future, and you have probably heard by now that banks rely a great deal on a numerical test you never signed-up for, called the FICO. The Fair Isaac Corporation provides the standard scoring model used by the nation’s three credit bureaus – Experian, Equifax, and Trans Union – which in turn supply almost all of the nation’s 12,000 banks and financial institutions with your credit score. This is the SAT of borrowing money, and like it or not, you need to get a good score on the test, even though you don’t remember ever sitting for an exam.

The harsh reality is that you cannot drastically change your FICO overnight. The credit bureaus look to your last 10 years of credit history to determine your score. Either you have paid your bills on time in the past or you haven’t.

The good news is that you can take moderate steps in the short-run to improve your score and borrowing costs. And in the long-run, being savvy about what affects your credit score can drastically improve your ability to borrow cheaply from your bank. Being an entrepreneur is a marathon, so prepare for future success by taking steps today that will make you financially fit.

Here are four small steps to boost your FICO and help you borrow more at a better rate.

The $42 municipal garage parking ticket you left unpaid two years ago is still on your credit report. The $50 cancellation fee for mobile-phone service from four years ago is still there too. Don’t fight this. Don’t be stubborn. I know the parking garage attendant may have made a mistake, and that your cell-phone service was terrible. It may not be fair, but you don’t have time for fair. Fair is for kids. Pay up and move on.

If a collection agency ever wrote or called you about something like this, you can assume it is on your credit report and is dragging your FICO down. This may be the difference between getting the $75,000 loan you need from the bank to expand your business, and not getting it. Your lower FICO score as a result of one $42 bill may be the difference between getting a bank loan at 8% instead of 15% interest. Would you like to pay over $5,000 extra in interest a year just to save the $42? No, so clear up those unpaid bills.

There’s no point in being a good financial citizen if you’re not getting a reward for it, and you should not assume that the collection agency or mobile phone company will report the debt settled. You are the only one who cares about your credit score, so you will have to do the nit-picky work to get the problem fixed. Be sure you get a statement from the creditor that shows satisfaction of the debt.

You should next contact the three credit bureaus directly to ask them how to prove the satisfaction of the negative item. You can find contact information for the credit bureaus at www.experian.com, www.equifax.com, and www.transunion.com.

Some companies offer to do this ‘clean-up’ of your credit report - for a fee of course - but many of these companies do not have a good reputation. If you are smart enough to start a business as an entrepreneur, you are smart enough to clean up your credit report on your own.

To put yourself on an equal footing with your bank officer, you should know what determines how they judge you. Are you a ‘Prime’ borrower or a ‘Sub-Prime’ borrower, or somewhere in between? What you don’t know can hurt you.

Any of the credit bureaus will sell you their reports – for approximately $12-15 each, and the Fair Isaac Corporation will sell you all three online for around $45.

A new federal law passed last year allows you to access your credit report once a year, for free, at www.annualcreditreport.com. While this is very helpful (and I highly recommend that you do get your free report) the report will not tell you your FICO score for free. This is like having someone describe how well you did on the SAT, question by question, without telling you what College you might expect to get into.

Are you worried about spending $45 to know your score? Look back at Rule #1 about Penny-Wise, Pound-Foolish behavior.

Finally, what is a good score? The credit report you purchase will explain it in more detail, but basically a score above 720 on the 300 to 850 scale makes you a Prime borrower, a score lower than 650 makes you sub-Prime, and in between is, well, in between. If you are a Prime borrower who is not being offered the best lending terms, let the bank know that you know what the score is.

This is one of the few ways in which you can affect your FICO in the short-run, albeit negatively. Every time you request a loan from a new bank or for a new purpose, you can expect the bank to pull your credit from one or more of the credit bureaus. In addition, every time you apply for a new credit card, you can expect the credit card company to pull your credit report and score. Multiple credit bureau inquiries will drag your FICO score down in the short-run, as it alerts creditors that you are in need of money, and appear very eager to get it. (One of the ironies of lending is that banks do not want to make low interest loans to people who actually need the money. J.P. Morgan famously stated that he had a policy of only lending to people who did not need the money.)

It may seem clever to ‘rate-shop’ a wide variety of banks for a loan, but that cleverness will quickly hurt your score and, ironically, could raise the interest rate that a lender charges you. (It should be noted that when you purchase your own credit report or ask for your free annual report, this does not lower your FICO score.)

If you clean up your report, know your FICO score, and ask for credit rarely, you’re on the path to borrowing more at a better rate.