UNDERSTANDING YOUR CREDIT SCORE & TIPS TO BUILD YOUR CREDIT TABLE OF CONTENTS Introduction .................................................................................................................. Page 3 Understanding Your Credit Profile ..................................................................... Page 4 How to Read Your Credt Report ............................................................................. Page 7 How to Dispute Something on Your Credit Report .................................. Page 11 How to Build Your Credit ..................................................................................... Page 17 Conclusion .................................................................................................................... Page 20 Page 2 | Credit Guide INTRODUCTION At Accion, we want to be a partner in your success whether or not you qualify for a loan immediately. Don’t we discouraged! We’re still committed to helping you become loan-ready for the future. Building your credit could bring you closer to getting the capital you need to grow your business. That’s why we’ve compiled this comprehensive Credit Repair Guide. From monitoring your credit score to building your credit, inside you’ll find all the answers to your credit questions. There’s tons of material online, but it can be hard to separate the wheat from the chaff so we’ve done the dirty work for you. Want to learn more? Find other helpful information and guides at our Business Resource Library: us.accion.org/business-resources/articles-videos. Page 3 | Credit Guide UNDERSTANDING YOUR CREDIT PROFILE What is Credit? You’ve probably heard a lot about “credit” in reference to purchasing things and the amount of money you can borrow. Let’s take a look at what credit is, why you need it, and perhaps most importantly, how you get it. Experian, one of the three major credit reporting companies in the U.S., defines credit as “borrowed money that you can use to purchase goods and services when you need them. You get credit from a credit grantor, whom you agree to pay back the amount you spent, plus applicable finance charges, at an agreed-upon time.” In other words, credit is money in the bank, which can become money in your pocket. It comes in the form of credit cards, payment agreements with vendors, other service providers and banks or other lenders. The amount of credit any of these entities will grant you depends, in large part, on your credit rating—how trustworthy you have been judged to be regarding money, and what kind of risk you pose in paying it back. When people talk about building credit, they’re essentially talking about establishing and shoring up their credit rating, which makes it it easier and cheaper to borrow money. Generally speaking, the better your credit rating, the greater your borrowing capacity, and the less it will cost you. What is a Credit Score? Your credit rating is based on your credit report, which contains information such as your Page 4 | Credit Guide income, how long you’ve lived at your present address, how long you’ve had your current job, how much money you have in the bank, and how you have handled credit in the past. In the U.S., the three major companies that compile credit reports are Experian, Equifax, and TransUnion. Each credit bureau has its own formula for calculating your credit score, but all of them gather information and data from various sources and providers. The Fair Credit Reporting Act regulates what kind of information they use and who they can release it to. Your credit report contains a lot of information that would be demanding for a bank or other lender to wade through, so it is summarized by a credit score: a three-digit number generated by compiling and weighing the information in your credit report. While there are a number of models for credit scores around, the FICO score is the most commonly used. FICO Credit Score Breakdown According to the website of its developer, 90% of all financial institutions in the U.S. use FICO scores in their decision-making process. So, what goes into your FICO score? Your payment history is the single most important piece of the puzzle (35%), followed by how much you owe (30%), the length of your credit history (15%), how much new credit you have (10%), and the types of credit used (10%). Page 5 | Credit Guide Why Do You Need Credit? Unless you have spare thousands tucked under your mattress, you will most likely need to borrow money to make a major purchase. On a personal level, that might mean a car or a home. For your business, it could mean equipment or a building. Without credit, it will be more difficult to make a big purchase. Companies that are in the business of lending money try to ensure they will get paid back. And unfortunately, your being a swell person just isn’t enough of an guarantee for them to go out on a financial limb for you. They need to take a close look at your track record to see how you’ve handled money in the past. For many lenders, your credit history is the single biggest factor they’ll take into consideration when deciding whether to approve your funding request for a loan and the amount. It doesn’t stop there, though. People with good credit are often seen as more trustworthy in other areas as well. Often, employers or landlords will check your credit information as part of their selection and decision-making process. By law, you are entitled to receive a free copy of your credit report from each of the three big credit bureaus once per year. To do so, you can visit www.annualcreditreport.com or call toll- free 1-877-322-8228. You can order from all three at the same time or one at a time. To keep a good handle on your credit score, think about ordering one from each of the companies every four months. This will give you a good year-round picture of what your credit looks like. You are also entitled a free copy of your report if you are turned down for a credit card or loan. Page 6 | Credit Guide HOW TO READ YOUR CREDIT REPORT Your credit report is a detailed snapshot of your financial life. If you’ve ever applied for a loan or a credit card, the decision about whether to approve you was largely based on the information in your credit report. Some employers check the credit reports of prospective employees, as do many landlords, and companies considering doing business with someone. Of course, in order to read it, you have to have it. By law, you’re entitled to a free copy of your credit report from each of the three major credit bureaus, Experian, Equifax and TransUnion, once a year. You can order your free credit report online or by phone at 1-877-322-8228. Reading Your Credit Report The first thing you’ll notice is that each of the credit reports have slightly different information, which is why experts suggest you order all three. Reporting is a voluntary system set up between creditors and the credit bureaus; this means that creditors can supply information to whichever agency they want, to all of them, or none of them. The basic setup, however, is the same. Each report will contain information that identifies you, your credit history, public records and any inquiries that were made about your credit. Identifying Information This is exactly what it sounds like: information that identifies you and is specific to you. This includes your name, Social Security number, past and current addresses, birth date, phone numbers, driver’s license numbers, your employer, and your spouse’s name. Page 7 | Credit Guide You may notice different spellings of your name or an address that isn’t exactly right -for example, it says “Road” instead of “Drive” for a street name. Usually, this occurs because it was reported incorrectly to the credit bureau. Unless the names, addresses, or other personal information aren’t related to you at all, it’s nothing to be concerned about. If there’s something on there that’s very wrong, contact the credit bureau to clear it up. Account Information This is the meaty part of the credit report: a listing of all the accounts ever connected to you. These entries are sometimes called trade lines, and each will have the name of the creditor and your account number, which may be scrambled or shortened for security. This section is divided into accounts that are currently in good standing and those that are delinquent or potentially negative in other ways, such as having had late payments or going over your credit limit. For each account listed, the information will include: the type of credit it is (such as an installment loan like a mortgage, or revolving credit like a credit card), whether it’s an individual or joint account, the total amount of the loan or the credit limit on the card, how much you currently owe, if you are past due (and if so, by how much), the monthly minimum payment due, the date the account was opened, whether it is still open (or inactive or closed), and how well you’ve paid. The listing will also show the most recent date the account information was updated by the creditor and any remarks the creditor has made about your account. If an account went into collection, it may appear here or in the next section that details items that are part of the public record. Credit Inquiries This is a listing of anyone who’s accessed your credit report within the past two years. It will include so-called “soft” inquiries made by lenders for promotional purposes, such as when you get a pre-approved credit card offer, along with “hard” inquiries made by a lender or creditor when you apply for a loan or line of credit.