The nuts and bolts of consumer and business credit reporting

Transcription

1 The nuts and bolts of consumer and business credit reporting Making sure your personal credit report doesn t cause a credit breakdown for your small business 2014 Experian Information Solutions, Inc. All rights reserved. Experian and the marks used herein are service marks or registered trademarks of Experian Information Solutions, Inc. Other product and company names mentioned herein are the trademarks of their respective owners. No part of this copyrighted work may be reproduced, modified, or distributed in any form or manner without the prior written permission of Experian.

2 Introduction The purpose of this presentation is to help you better understand how credit reporting affects your small business, and to provide you with information about how to manage both your personal and business credit reports in order to help your business (and you) succeed. Your personal credit can sometimes have an affect on your ability to get credit for your business. Likewise, your business s credit situation can sometimes impact your personal credit report. We hope this information will be helpful to you when it comes to knowing how to protect both your business and your personal credit rating Experian Information Solutions, Inc. All rights reserved. 2

3 You might have two credit reports Business credit report Identifying information Payment information Public record information Inquiries Company background information Additional data Business credit score Personal credit report Identifying information Account information Public record information Inquiries Dispute instructions 2014 Experian Information Solutions, Inc. All rights reserved. 3

4 What is a business credit report? A decision-making tool Much like personal consumer credit report More than 27 million businesses in the U.S. have established credit relationships with: Suppliers Wholesalers Manufacturers banks Leasing companies Other financial institutions 2014 Experian Information Solutions, Inc. All rights reserved. 4

5 How do you establish a business credit report? First, ensure creditors and suppliers can validate your business information: Incorporate or form an LLC (Limited Liability Company) to ensure your company is seen as a separate business entity Obtain a federal Employer Identification Number Open business bank accounts in your legal business name Set up a dedicated business phone line in your business name and make sure it's listed Much like with your personal credit report, once you open trade accounts for your small business, your payment history for those accounts may be reported to Experian or other business credit reporting agency. Establishing credit with companies who report trade and payment information to business credit reporting agencies will help you build your business credit report Experian Information Solutions, Inc. All rights reserved. 5

6 Your Business Credit Report Identifying Information/Company Background Company name Key personnel SIC code Business type (i.e.. Incorporated, LLC) Address Phone number Date of incorporation Years in business Number of employees Sales 2014 Experian Information Solutions, Inc. All rights reserved. 6

7 Your Business Credit Report Payment Information Current Days Beyond Terms Payment Trend Indicator Lowest 6 month balance Highest 6 month balance Current total account balance Highest credit amount extended Median credit amount extended Individual account information Public records 2014 Experian Information Solutions, Inc. All rights reserved. 7

8 How long is information kept on my business credit report? Experian uses standard industry and government guidelines for keeping data on file. Expiration dates for data ensures that the information presented in a report is current enough to create an accurate picture of financial health. Trade Data: 36 months Bankruptcies: 9 years and 9 months Judgments: 6 years and 9 months Tax liens: 6 years and 9 months UCC filings: 5 years Collections: 6 years and 9 months Bank, Government & Leasing: 36 months 2014 Experian Information Solutions, Inc. All rights reserved. 8

9 How can I obtain my small business credit report? Order a copy of your business credit report at one of two websites: If you have been declined credit within the last 60 days based on information provided in your Experian business report, you may get a free copy by contacting Experian Commercial Relations by calling (888) Experian Information Solutions, Inc. All rights reserved. 9

10 How can you monitor your own business credit report? Just like with your personal credit report, it is important to check your business credit report frequently to ensure that the information is accurate and up-to-date. You have the option to order a one-time business credit report from Experian, or you can sign up for credit monitoring. Experian offers a business credit monitoring service that can help you by providing unlimited access to your report and notifying you of changes to your business credit file. Monitoring your business credit report will help you stay abreast of any changes that could negatively affect your business, as well as help prevent business identity theft by monitoring inquiries into your file Experian Information Solutions, Inc. All rights reserved. 10

12 Reviewing personal reports for business purposes The Fair Credit Reporting Act (FCRA) allows lenders to review for business lending purposes the personal credit histories of: A proprietor of an unincorporated business A partner in a partnership A guarantor of a business loan The personal information must be used solely for a business credit transaction 2014 Experian Information Solutions, Inc. All rights reserved. 12

13 The benefit of personal credit reports More than 90% of U.S. businesses are small Fewer than 25 employees Less than $20 million in annual revenues Small businesses may have little or no credit history on which to base a decision Personal credit history acts as a reference for entrepreneurs 2014 Experian Information Solutions, Inc. All rights reserved. 13

14 Predicting risk: The relationship between business and consumer credit scores Half of all small businesses use some form of personal credit to finance their businesses Is there a high correlation between business and personal credit reports? Does a small-business owner allow his or her personal credit to suffer first in an attempt to protect the business? Does the owner allow business credit accounts to go delinquent to protect personal credit? 2014 Experian Information Solutions, Inc. All rights reserved. 14

15 Predicting risk: The relationship between business and consumer credit scores Examined 50,000 small businesses and their owners over four years No business or personal credit delinquencies at the beginning of the study Each quarter the study examined the number of businesses and business owners who went 90 days or more past due on any account or had a derogatory public record recorded against them 2014 Experian Information Solutions, Inc. All rights reserved. 15

16 The big picture Business bad Owner bad 9.14% 8.12% Both bad 0.34% Good 82.13% Of those that went bad, 53.5% revealed the first signs of trouble through their business credit report 2014 Experian Information Solutions, Inc. All rights reserved. 16

17 The size effect Personal and business credit is far more intertwined for owners with four or fewer employees These micro-businesses may not separate their personal and business finances enough or may be more prone to use personal credit to support business 70% of business owners that showed signs of trouble first on their personal credit report were micro-business owners Businesses with five or more employees consistently showed first signs of trouble on the business credit report 2014 Experian Information Solutions, Inc. All rights reserved. 17

18 The age effect Younger businesses more often showed first signs of trouble on personal credit report 30% of all cases in which businesses where personal credit report showed first signs of trouble were under two years old Three-to-five years were almost equal 37% of all cases in which businesses where business credit showed first signs off trouble were over 10 years old For businesses over five years old, business credit report is best indicator of risk 2014 Experian Information Solutions, Inc. All rights reserved. 18

19 The bottom line Both credit reports are important Best tool for predicting small business failure is blended information no matter the size Minimizes lending risk to small business Using both business and consumer information provides earliest, most accurate warning of potential problems Creates an edge in collection activity 2014 Experian Information Solutions, Inc. All rights reserved. 19

20 What happens if I feel information on my Experian business report is wrong? If you believe there is inaccurate information on your small business report, you will need to obtain a copy of your report. Incorrect demographic information can be updated online. All other disputes must be submitted in writing, and an agent will be assigned to complete the investigation. This dispute resolution process typically takes less than 30 days For more information, visit: To speak with a representative, contact Commercial Relations at Experian Information Solutions, Inc. All rights reserved. 20

21 How does the dispute process work for my personal credit report? While not required we recommend you obtain a copy of your personal credit report directly from Experian One report free every 12 months at Follow instructions from lender if adverse action is taken Subscribe to monitoring service or purchase an individual report at Credit reporting company verifies with the source of the information (creditor or court) Must allow days for processing Source verifies, corrects or updates Secure electronic mail system is used Creditors required to report corrections to all databases You can add a statement of dispute if you disagree with the results of the dispute 2014 Experian Information Solutions, Inc. All rights reserved. 21

23 Who is Credit Builders Alliance? To create innovative solutions for asset building organizations helping low- and modest income households and businesses build credit and financial access. Good Credit is an Asset Mission driven nonprofits and other entities are uniquely positioned to help the entrepreneurs and small businesses they serve build credit as an asset often the FOUNDATIONAL asset Credit Builders Alliance, Inc. Some rights reserved.

24 Good Credit : Passport to the New Economy info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

25 Credit Catch 22. o 64 million U.S. individuals have insufficient or no credit history o o 56% of U.S. individuals have poor credit scores, ranging from subprime to low-prime info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

26 Key Terms CREDIT SCORE: Three digit number summarizing your credit risk based on a snapshot of your credit report at a particular point in time CREDIT REPORT: Record of a consumer s credit history CREDIT HISTORY/FILE: Record of transactions involving the use of credit and other products/services info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

27 Increase Access & Options What and how much we pay for credit How we store & manage our money How we get around and transport commercial goods Where we rent, grow our businesses The cost of business operations and expansion Credit Builders Alliance, Inc. Some rights reserved.

28 Smooth Income & Buffer Shocks Without access to affordable credit it is difficult if not impossible to deal with cash flow constraints Paid in Full each month = 30 day 0% loan info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

29 How? How do you build credit scores and strengthen credit reports? ESTABLISH & MAINTAIN ACTIVE TRADE LINES = ON-TIME payments REPORTED to a credit bureau EVERY month BUILDS credit info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

30 What is Credit Building? How? WHAT IS AN ACTIVE TRADE LINE? An Active Installment (loan): Has a Balance Has a monthly payment Is not closed An Active Revolving (credit card): Doesn t need to have balance or payment At least one payment has been made in the past 6 months (date of last activity) info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

31 3 ACTIVE trade lines always paid ON- TIME! MIX of installment and revolving What is Credit Building? Best Practice Installment: assess affordability of monthly payment Revolving: maintain debt balance below 30% & don t use for general consumption 6 months of history and activity PAIR with credit education & support info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

32 What is Credit Building? The Key Opening and successfully managing financial products is key to building and maintaining a good credit history BUT Individuals, businesses, and communities with no, thin or poor traditional credit histories have few opportunities to build good credit info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

33 The Players Rulemaking & enforcement authority historically fractured, CFPB now a game changer Voluntarily submit data; may or may not report to all 3 (still regional inconsistencies) The Government Models designed differently based on consumer files (FICO, VantageScore, etc.) Lenders & Other Businesses (incl. public records) Consumers Risk Score Modelers Credit Reporting Agencies Big Three: Experian, Equifax, TransUnion Also CoreLogic Credco, subprime CRAs for payday loans and alt. data; specialized CRAs with medical, employment, checking account history (e.g. FIS/Chex Systems) SOURCE: Experian info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

34 There are Thousands of Scores What Score? Q: A: Lenders use different scores designed to measure risk for different types of lending -- including mortgage, auto, and personal finance loans and different types of consumers like those considered more or less risky Credit Builders Alliance, Inc. Some rights reserved.

35 Fair Isaac and the Bureaus FICO Scores Generic Mortgage Personal Finance Bankcard Installment Score Auto MANY GENERATIONS (latest: FICO9 & FICO Alt. Data) Experian Equifax TransUnion Different bureau, different algorithm FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries. info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

36 VantageScore and the Bureaus VantageScore 3 GENERATIONS (latest: VS3.0) Experian Equifax TransUnion Same algorithm across bureaus VantageScore is a registered trademark of VantageScore Solutions, LLC. info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

37 Know the Fair Isaac Score Traditional FICO: SOURCE: FICO Credit Builders Alliance, Inc. Some rights reserved.

38 Know the VantageScore VantageScore 3.0: SOURCE: VantageScore Credit Builders Alliance, Inc. Some rights reserved.

39 Score Impact Best Practice Maintain ACTIVE trade lines (pay on-time and regularly) Keep balances low (=<30%) Don t close old inactive accounts in good standing if you don t need to Maintain mix of active credit trade lines Don t open more accounts than you need to info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

40 Know the Report! Know the Report! A credit report typically contains: Personal Identifying Information Name Address Social Security Number Date of Birth Credit History Open trade lines Active trade lines Derogatory items such as late payments & accounts in collections Public Records Bankruptcies Foreclosures Judgments Liens Inquiries List of creditors and other authorized parties (hard and/or soft) that have requested and received a copy of the credit report in the last 24 months info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

41 Many Needs, Many Reports Did you know There is not just one! Like scores, credit reports are customized by different data sellers for the needs of different businesses and for consumers Credit Builders Alliance, Inc. Some rights reserved.

42 Remember HOW DO YOU BUILD CREDIT AND STRENGTHEN REPORTS? ON-TIME payments REPORTED to a credit bureau EVERY month BUILDS credit info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

43 Where to look? Entrepreneurs with no credit, or challenged credit may have difficulty finding responsible credit products that they are eligible for. Consider the following options: Banks/Credit Unions may offer small-dollar secured and unsecured products. If your client already has a relationship with a financial institution, this may be a good place to start. Non-profit/community lenders (including CBA members) in your area may have programs specifically designed for underserved communities or those with challenged credit. info@creditbuildersalliance.org 2013 Credit Builders Alliance, Inc. Some rights reserved.

44 CBA Credit-Builder 5-Step Leverage Success Leverage Credit Scores and Reports Access to capital, favorable rates and terms on business loans and lines, commercial real estate options, etc. Increased revenue and financial stability Company Longevity Established & improved credit histories Credit Builders Alliance, Inc. Some rights reserved.