In previous newsletters, I have written about the myths about what affects and does not affect your personal credit score. Although there are a number of things that a lender will look at before offering commercial financing, a credit score very much plays a big part in their decision for approval and rates. All lenders have thresholds with credit score if you are anything below 750. Most commercial buyers are between 550 - 700, so the difference in rate between 600 to 650 could mean a number of more lenders willing to compete for your business. You may be surprised how much you can raise your score by just paying attention to a few small details and paying less attention to the "myths" about credit score that are out there.

I encourage all of my clients to run a free credit report at www.annualcreditreport.com. This will show your credit report from all 3 major reporting agencies - Experian, Transunion, and Equifax. You will see exactly what a lender is looking at versus a report at Credit Karma (or similar), which lenders do not consider.

I am told almost weekly by a client that they were not aware of a collection or past-due account due to having moved or sometimes just never being contacted. It is not that difficult to monitor and set a goal of 700 or higher to get the best possible rates. Pay off any collection accounts that you can. I would estimate that 50% of all collection accounts are less than $100, but they affect your score greatly. For larger collections or ones that are past-due, work out a payment plan to get them paid off.

Additionally, there are credit repair agencies that will help you get derogatory accounts eliminated. If you would like a referral to a credit repair company, feel free to contact me.

Here are 10 myths about credit

1. Paying off delinquent loans removes it from your credit report

If you have paid off a delinquent loan or credit card balance, you may have thought that it was then removed from a credit report and will no longer affect your credit score. Negative information such as late payments, collection accounts, and bankruptcies will remain on a person's credit reports for up to seven years. Certain types of bankruptcies stick around for up to 10 years. Paying off the delinquent account won't remove it from a credit report, but it will update the account to indicate it as "paid".

2. Canceling credit cards boosts my credit score

This is often a popular thing to do for therapeutic reasons, but closing an account actually damages your credit score, especially if it's one with a long history of good payment. Not only does the loss of history affect your score now, but the drop in your debt-to-available credit ratio does as well. Sometimes a credit card's annual fee is just a cost of doing business.

3. Too many inquiries always hurt

While a lot of inquiries can certainly drop your score a few points, this fact is largely inflated. Most scoring models actually count several inquiries within a certain time frame to only be considered as one inquiry (as far as the score is considered). This is because the credit bureaus generally assume that the multiple inquiries are most likely tied to the same loan request. All inquiries fall off after 24 months.

4. Pulling your own credit affects your credit score

This is absolutely not true. Not only does a consumer have unlimited use of services such as credit karma and many others, but as mentioned above, every consumer is allowed a complete report from all 3 credit bureaus at www.annualcreditreport.com. This is available for no cost on an annual basis and does NOT count as an inquiry. It won't show your score but it will show all accounts that the bureaus are seeing. This allows you to take appropriate action if you see any errors.

5. Paying on time each month results in good credit

This is another case where a debt utilization ratio comes into play for your credit score. The idea that simply paying your credit card bill on time every month will give you good credit is not necessarily true. If your utilization is high, then you can have your FICO score drop dramatically. By ratio, if you have a $5,000 credit line and you run a balance consistently above $4,000, it has a more negative effect than if your balance was at $1,000. More available credit on any credit card is a good thing. Credit bureaus and lenders put a lot of weight into ratio utilization.

6. You must be in debt to have a good score

Not true. A key factor that determines your credit score is your debt-to-available-credit ratio. If this is too high, your score will drop. Another area that impacts a credit score is not whether you pay the balance off in full each month, but rather consistent on-time monthly payments. As long as you make your payments on time, you can maintain a great score with little to no debt.

7. FICO scores are locked in for six months

Credit scores can change monthly as creditors update the status of your accounts. There is no way to know exactly which day of month creditors report to the agencies that they subscribe to.

8. My debit card can't affect my credit

While a debit card does not report to the credit bureaus, it can help or hurt you if it is tied to an overdraft line of credit. An overdraft line of credit is basically a line of credit that is available in the event that you overdraw your checking account. If you dip below zero, the debit card will still work, but instead of drafting your checking account, it will begin pulling on the line of credit. If you fail to pay on the line of credit or if you use up too much of the available credit, you can hurt your score. Most accounts are set to auto-pay for at least the minimum amount due, assuming you have enough money in your checking account by the billing date

9. A secured credit card helps build credit

While a secured credit card can possibly help you build credit, it's important to understand how they work and to be aware of their limitations. Secured credit cards are not the same as pre-paid credit cards, which can't help you build credit. That being said, not all secured credit cards report to the credit bureaus. This is because it costs the creditor money to report to each bureau and, by definition, secured credit cards cater to subprime borrowers with low credit limits, which can limit the bank's ability to make money.

10. Co-signing a loan won't hurt as long as the responsible party pays

If you add yourself to someone's loan on an amount large enough to affect your debt-to-income ratio, then you're hurting your credit. If you need your own loan in the future, you may be unable to secure it if your credit shows too many other financial obligations. The lender may or may not accept a letter stating that you do not pay the bill in order to get you qualified, but you are still legally responsible.

I hope the above information is helpful. I encourage anyone who sees a window of opportunity to improve your score to seriously consider putting in the effort to do it. The difference in rate for a higher credit score can mean thousands of dollars over the course of an equipment loan. Those dollars can be used elsewhere to grow your business!

Have a great month!

Tim