De-Mystifying Your Credit Score

So, we all know we have one. We all know that our credit score is a determining factor of how much we are going to pay in interest when we apply for a loan. We especially know how hard it is to get a loan when we have a low credit score. So what is it that we do about it? We’ll explore the topic of your credit score and what it means to you today and see what we can come up with. Let’s get on with it, what is a credit score?

Let us first start out by saying that your credit score is an arbitrary number between 300 and 850 that is supposed to give a weight to your credit worthiness. Essentially the higher the score the lower the risk for the lender. There are three primary credit agencies that keep track of your credit history and they are the ones that individually score you, thus the reason for the wording “arbitrary.” These three credit agencies are as follows:

1. Equifax
2. Experian
3. TransUnion

Now, as I said, these three companies give you a credit score that is specific to the credit history that they have for you and what history they have and the score that they give you will differ from agency to agency. So if they have three different scores how do you know which one will be used, well the answer to that is none of them and all of them. Generally speaking when someone is talking about their credit score they are usually referring to is their FICO credit score. For the purposes of this article we will not go into what your FICO score is other than they are a third party who takes the information as provided to them from these agencies and combines them in a proprietary way to give you a single credit score. It is this number that plays such a pivotal role in your dealings with lenders.

So now we know generally where your credit score is derived from; now we need to know what it all means.

Equifax is the oldest and largest of the three credit unions and when you go and apply for a credit card at your local retail store more than likely they will just refer to Equifax. They will pull up your history and review it looking for certain indicators beyond just your score to determine if they want to risk lending money to you and at what interest rate they feel the risk is mitigated. These indicators could include your propensity to pay your bills on time. Timely bill payment is probably one of the best things you can do to keep your credit score high. There is something you need to be aware of when it comes to timely bill payment and that is that most lenders will not report a late payment to the credit agencies until you are greater than 30 days past due. This isn’t a way to game the system, you still have to pay, but know that if you are a few days late on your payment you are more than likely safe from an adverse effect on your credit score. However, I would not suggest testing the patience of your lender if you can avoid it. If your lender notices that you are consistently 15 days late they may not be so willing to let you slide but if you are always this late you would be following our advice of calling your lender to renegotiate your payment terms now wouldn’t you?

Timely payment is import, we know that, but what else is a factor in determining how much of a risk lending money to us is? Next your potential lender is going to look at the amount of your current debt and compare it to your stated or verified income. If you make 45k a year and owe 30k in credit card debt you are going to be a very high risk. Think of it in these terms, if your brother in law came up to you and asked to borrow 100 bucks and will pay you back in a week but you know that he already owes 100 bucks to your uncle this week and he only makes 250 a week, it probably is not a safe bet that he’ll pay you back at least not when he says he will. This same principle applies to your lender if you owe a significant amount of your income it is not in their best interest to lend you money because the chances of you paying them back is small because more than likely you won’t be able to afford to pay them back. If by chance you do find a lender that is willing the interest rates will probably be astronomical, your credit limit will be very low and you’ll be forced to pay only the interest and little to none of the balance. All of this actually has a name and it is called your debt to income ratio. This is calculated by taking the amount of debt owed and dividing it by the amount of income so using the previous example of an earner making 45k a year and having 30k in debt that is 30k / 45k equals a 66.66% debt to income ratio. As a reference point, and this may be different now with the economic crisis the world has just gone through, most conventional mortgages allowed up to a 45% debt to income ratio to qualify. So the previous earner would have to lower his/her 30k in debt to approximately 20k to be able to qualify and more than likely they will have to have money down and a co-borrower since they are right at top of the allowed ratio.

After determining your debt to income ratio they are going to look at how many revolving debts compared to how many installment debts you are carrying. This provides them a perspective on both your spending habits and your risk of abandoning your obligations as a debtor. Revolving debt is debt where the amount due could change month to month due to a variety of reasons such as increased spending, change in interest rate, etc. For typical households their revolving debt is primarily in credit cards. Creditors feel that if you have a large amount of revolving debt you tend to rely heavily on your credit cards and that you have a greater chance of walking away from your financial obligations to them. Installment debt is debt where there is a fixed payment that is paid until interest and balance are paid in full. Once again for most households their installment debt is their mortgage and their auto payments. Debtors with high installment debt compared to revolving debt are deemed to be a much lower risk because there is a tangible asset that can be recovered if the debtor does not pay. Furthermore, it is felt by creditors that debtors will try not to abandon installment debt because they are more likely to pay those debts before revolving debt so that they don’t lose shelter or transportation. Even if you are not carrying a balance on any of your credit cards but you keep quite a few open this can throw up red flags because they see a potential for heavy debt to be incurred. Then again they do not like to see no credit cards because this could indicate that you are not responsible with them so you don’t have any among a multitude of other reasons. You could ask 10 different people and you would get 10 different answers to the number of credit cards you should keep open at any given time, I don’t know the magic number but in my household we keep 5 open between my wife and I but have no balance on them. Some credit card companies charge you or close the account for inactivity, so check your terms and conditions or call to find out what their procedure is for long periods of inactivity. You may just have to fill up your tank every now and then and just pay it off every month.

We are starting to get a pretty good idea of the things they are looking for. So what else might they use to determine your score? Lenders will also look at your credit application history. Every time a lender looks at your credit report it is logged on your credit report. How long these inquiries stay on is different between agencies and they don’t release that information to the public but having reviewed my credit report a few times a year it is usually only 6-12 months. If a lender sees that you have aggressively applied for credit recently they will be more weary to lend to you under the suspicion that there is something going on in your life that you suddenly need immediate access to credit. They also might see that you have been denied thus causing them to be more cautious since others have denied you. I personally have known of more than one person who was pre-approved for a mortgage but shopped around at other banks and when they went to get their mortgage they were denied due to the excessive credit requests. Be careful, research rates before actually running your credit, it can seriously hurt you by shopping around and applying for credit at multiple lenders.

While there are numerous other details lenders use to scrutinize your credit report the last one we’ll talk about today is the length of your credit history. This criteria alone is why younger individuals have a proportionately harder time acquiring credit than older individuals. Lenders operate under the premise that the longer you have been borrowing money and repaying it the more responsible you will be. While this may or may not be correct it is common practice across all agencies. If you have less than 10 years of credit history you are automatically subject to further scrutinizing. It really doesn’t matter if your credit history is impeccable this single criteria at times will serve to cause a lender to not lend money despite all other indicators being in the green. I am sure they all have statistics to provide justification for this methodology but at times it seems unfair when being denied even for the smallest of loans. There isn’t much you can do to affect this criteria other than possibly speaking to the lender and advocating on your own behalf the quality of debtor that you are.

Finally I will close with how important it is to keep a close eye on your credit report. My wife and I check our credit reports 3-4 times a year. In America the government has said that every citizen is entitled to 1 free copy of their credit report from each agency once a year. This credit report is very basic and will not even provide you what your score is. Monitoring your credit report yields you two very big advantages. First, you keep a close eye to ensure that your lenders are updating the agencies promptly with you payoff information. Second, you can catch any anomalies that can show up from things such as identity theft and incorrect information being reported. I can not advocate checking your credit report multiple times a year enough.

I hope this sheds some light on what your credit score is and how it is determined. Knowledge is power and you need power to get yourself out of debt and to play on an even playing field with your lenders.

The Complete Handbook for Buying and Financing a Truck

Trucks, trailers or any other commercial vehicles are important business assets required in the normal day-to-day running of your business operations. As a business owner, you are constantly faced with a number of critical decisions, whereby you have to decide – what is best for your business. So, if you are a business owner you should carefully consider a number of important factors when it is time to get a new truck, trailer or any other commercial vehicle, such as having:

1. The right truck that will help to keep your business competitive

2. The right truck for the work required and at the right price

3. The right finance arrangement to buy a truck

Different Types of Truck, Trailer or Commercial Vehicle

Business owners can buy any of the following vehicles:

>> New Truck

>> Refrigerated Lorry

>> Trailer

>> Tipper, or

>> Transporter (light or heavy)

Factors to consider before buying New Truck, Trailer or Commercial Vehicle

There are a number of factors you should take time to consider when buying a vehicle, and you should ask yourself the following questions:

>> Is the truck, trailer or commercial vehicle new or used?

>> Is the truck, trailer or commercial vehicle coming from a dealer, auction, or private sale?

>> Has the truck, trailer or commercial vehicle been previously written-off?

>> How many hours has the truck recorded?

>> Is there any money owing on the truck, trailer or commercial vehicle?

>> Are you considering drawing down from your home loan (e.g. equity release) to give you the required cash to buy your truck, trailer or commercial vehicle?

Finance Arrangement

Listed here is a brief summary of the types of finance arrangements available in the market place, and after you have read this article you should find choosing the right finance arrangement to be the simplest decision you will make:

Finance Lease – This financing arrangement enables you (the customer) to have the use of your truck, trailer or any other commercial vehicle and the benefits of ownership, while the financier (lender) retains actual ownership. The finance lease arrangement will also enable you to free-up your capital for other business purposes.

Commercial Hire Purchase – This financing arrangement is where you (the customer) hire the truck, trailer or any other commercial vehicle from the financier (lender). You have the certainty of a fixed interest rate over a set period (I.e. 2 to 5 years) and the flexibility of reduced monthly payments by including a final “balloon” payment at the end of the term.

Asset Loan – This financing arrangement gives you (the customer) the security of knowing that your truck, trailer or any other commercial vehicle is an asset of your business and it offers you the certainty of a fixed interest rate, over the choice of loan terms (I.e. 1 to 5 years).

Seek Expert Advice

I sincerely recommend that you should seek expert advice before choosing any of the truck finance arrangements because, the taxation and accounting treatments you choose may vary from option to option.

If you want to remain in the driver’s seat and concentrate on running your business so that you can cover your costs, overheads and running expenses, then look no further and take advantage of professionally qualified and specialised finance brokers, because:

>> They have a thorough knowledge of the finance and trucking industry

>> They have access to many lenders/credit providers as they deal with them on a regular daily basis

>> They can customise the best truck finance arrangement for you

>> They can get you into a new truck quickly and easily

So, if you don’t want to spend hours of your valuable time trying to find the right truck finance arrangement, then let a specialised and professionally qualified finance broker do the running around for you.

Three Types of Credit You May Not Know You Have

Every business has three types of credit: the Consumer Credit of the business owner, Bank Credit, and Business Credit.

Most business owners are familiar with their consumer credit. This is credit that reports to the consumer credit reporting agencies TransUnion, Equifax, and Experian. Scores range from 350-850, and credit is linked to the owner’s Social Security Number.

Most business owners don’t know that banks have their own internal scoring system for businesses. This scoring system is known as bank credit, or a bank rating.
This score is based on how you manage your business bank account. Having $10,000 or more in your bank account will give you a good bank credit score.

A business also has its own credit profile, known as business credit. Business credit reports to the business credit reporting agencies, Dun & Bradstreet, Equifax, and Experian. Scores usually range from 0-100, and credit is linked to the business EIN number, not the owner’s SSN number.

Business credit provides a lot of benefits. For one, it has no link to consumer credit, so no personal credit check is required, and accounts don’t report to the consumer agencies.

No personal guarantee is needed in most cases, so you won’t be personally liable for your business debts. Also, credit limits are 10-100 times higher than with consumer credit.

With consumer credit, just because you have an SSN doesn’t mean you have an established credit profile.

To get a consumer credit score and profile, you first must: get approved for accounts that report to the consumer reporting agencies, use those accounts, and pay your bills for those accounts, then and only then will you have an established credit profile and score for your SSN.

Just like with consumer credit, just because you have an EIN doesn’t mean you have an established business credit profile and score.

To get a business credit score and profile, you first must: get approved for accounts that report to the business reporting agencies, use those accounts, and pay your bills for those accounts, then and only then will you have an established credit profile and score for your EIN.

Entrepreneur.com reports that 90% of business owners know nothing about business credit. Business credit is usually reserved for established businesses, or those that meet a certain criteria for approval, and often is used by companies big enough that they have a CFO.

You can build business credit and get a good score QUICKLY! Having business credit increases the value of your company, and you won’t need financials or collateral for approval.

Any business can actually establish business credit, but the key to success is knowing the formula for success, knowing what steps to take and in what order.
Business credit isn’t highly promoted in stores, or with cash credit sources, so usually only larger businesses take advantage of it.

Credit issuers and lenders like it this way, because usually those larger companies are more established and have less of a risk of default, although it’s not actually the size of your company they look at for approval.

To get approved your business must pass a test that shows the credit issuers and lenders that you are credible, no matter your size.

If you pass this test and are credible in their eyes, you’ll be approved for business credit. Many times you get approved automatically by their computers without someone manually reviewing your application.

Business size and how long you’ve been open aren’t really the driving factors for your approval, but passing this test is.

This means even if you just opened your doors yesterday and have little or no revenue, you can still be approved with most business credit sources… as long as you pass their test.

You must have a physical business address, or use a virtual address. You’ll need to have a business phone number, preferably a toll free number, and it’ll need to be listed in 411.

You’ll need a business fax number and you should have a professional email address, and website. You must have the proper licenses for your business, industry, city, county, and state and you need an EIN, entity setup, and bank account.

There are actually 20 items on this test that will be reviewed, but you now know some of the most important factors that credit issuers and lenders review.

When establishing business credit, there are actually three types of credit you can get: vendor credit (starter accounts that offer Net 30 terms), store credit (revolving credit cards available in retail stores), and cash credit (revolving credit cards such as Visa and MasterCard that card issuers or banks approve you for).

The biggest mistake entrepreneurs make when building credit for their business is that they try to apply for store or cash credit first, and skip vendor credit.

But stores and banks will NOT approve a business owner for credit until their EIN credit profile and score are established. If you try to apply for store or cash credit without an established business credit profile and score, you’ll be denied… 100% of the time.

You must get approved with vendors first who offer Net 30 terms. After you use those accounts and pay your bills, the accounts will get reported to the business credit reporting agencies.

Then and only then will you have an established business credit profile and score. Once it has been established, you can begin to be approved for store revolving credit.

You should seek out vendors who will approve a business for credit, even if none is established yet. There are actually many vendor sources who are well known for this: Uline, Quill, Reliable, and Laughlin and Associates, just to name a few.

To start business credit, you first should get approved for accounts with these vendors.

Some will require you purchase their products first and some will have you make three orders and pay before they’ll issue you a line-of-credit. But all of the sources I listed will approve a brand new business, even if you have no credit now.

You’ll want to insure you have a total of five payment experiences reported before you even think of applying for store credit. A payment experience is the reporting of an account to a business reporting agency.

So Quill, for example, reports to both D&B and Experian. That means that one account will count as two payment experiences. Laughlin only reports to Experian, counting as one payment experience.

Once you have five payment experiences reporting, you can begin to secure revolving store credit cards for your EIN.

KEEP IN MIND, all applications will ask for your SSN but you do NOT need to provide your SSN on the application. If you do supply your SSN, they WILL pull your personal credit… and if it’s bad your application will be denied.

When you leave the SSN field blank, they’ll pull your business credit. Once they see that you have business credit established and at least five payment experiences reporting, then you’ll start to get approved for store credit.

Most major retailers do offer business credit as well as consumer credit. Staples, Office Depot, Home Depot, Lowes, Target, Walmart, Costco, Sam’s Club, Radio Shack, Best Buy, BP, Chevron, Amazon, Shell, and most other stores, offer business credit.

Some sources like Home Depot might have more stringent approval requirements and want to see big revenue and three years in business for approval of no personal-guarantee credit. However, sources don’t have these requirements, if you have credit established for the business.

WARNING!!! Do NOT put your SSN on the application. Do NOT apply for revolving store credit without having at least five payment experiences reporting to the business credit reporting agencies. If you do either of these, you’ll be denied or you’ll have to give them your personal guarantee.

Once you have a total of 10 payment experiences reported to the business bureaus, then you can start to get cash credit cards. Cash cards are those issued by Visa, MasterCard, even AMEX, and are cards you can use anywhere, not just cards you can only use in one store.

It’s recommended that at least one of your 10 payment experiences has a high limit of $10,000 or more before applying for cash credit. Dell is a revolving store source who regularly approves business owners with established business credit for an account with a limit of $10,000 or more.

Key Bank and Home Depot are two sources that offer revolving cash credit cards you can use most anywhere; many banks offer these also.

When you follow these steps, your business can have an established credit profile and score.

This profile and score can then be used to get you credit in your business name, regardless of your personal credit, and without a personal guarantee.

You’ll want to continue building business credit, applying and getting more credit, using that credit, and getting approved for higher and higher credit limits.

Four Tips For Financing Your New Car

Whilst buying a car is without doubt an exciting time, it can also be stressful and costly. Most people (at least 80%) cannot afford to buy a new car outright. Therefore, most car buyers acquire a new car using a deposit as down payment and obtain car finance to fund the rest. The following five tips are valuable for people considering obtaining a new car as they give different options on how to best to fund the transaction.

1. Sell your current car privately instead of a part exchange – Whilst it is much more convenient to ‘trade in’ an existing vehicle as a part exchange on a new vehicle this will not maximise the money you get for your car. Done primarily for ease and convenience (if you put your car in as part exchange against a newer model you remove the whole selling process, advertising costs, people calling around your home to view the car and being annoyed by phone calls for weeks after the car has been sold), it is a known fact that a part exchange is the least profitable way to sell your car. Therefore, if you have the time and patience, it is advised that you opt for a private sale. Perhaps the best way to determine whether you should part exchange or sell is to determine the market value for your vehicle and compare this with some part exchange values. Whatever the difference between the two can be considered your payment for the hassle of private sale and therefore you can make an informed decision.

2. Car Finance From A Dealership – This is the most popular way to finance a car. Dealers provide approximately 65% of all car finance. The reason for this is that people shop for cars based on the price of the car and because 80% of all new car buyers need finance they end up taking finance from the same dealer that provides the best price on the car.

Dealers typically offer hire purchase or car leasing. Hire purchase is an arrangement where people sign a contract to make monthly payments across 3 – 5 years and they end up owning the car at the end of that payment period. Leasing is slightly different because it is often much, much cheaper you can have the option to buy the car at the end of the period or simply return it to the dealer. However, you must be careful with dealer finance (or any car finance for that matter) and you should always shop around and compare the monthly deal that you have been offered. Just because you negotiated a good price on the car doesn’t always mean that you are getting a good monthly price on the finance. In some cases the monthly payment could have a premium hidden in it with a high APR and therefore the calculation of your monthly payment may not relate to the ‘good price’ that you think you negotiated on your car. Therefore, shop around and compare the monthly payment, the total payment ensuring that you are comparing the same contract period etc with different dealers and finance providers irrespective of the price that you have negotiated on the car.

3. Car loans from a bank – Personal car loans account for only 13% of all new car finance. This is surprising because other than using cash, this is the only form of finance that enables the borrower to own the car from the point of purchase. Therefore, whilst most people think they own the car that they are driving, if they bought the car with finance and are still making monthly payments, then approximately 87% of all new cars are not actually owned by the drivers.

If you are thinking of purchasing a car using a car loan of some form you should always shop around based on APR. There are various comparison websites that enable you to compare car loans but you should always be careful about two things:

(i) the Apr that the website quotes to you is unlikely to be the one that you get. This is most likely the best APR you could get and it is often adjusted to meet how much of a ‘risk’ that bank may think you are;
(ii) do not submit too many applications for finance. If you submit three or four applications to different banks and you are refused by all of them, you might damage your credit record and make it difficult for you to obtain finance in the future. Some finance websites enable you to apply for a loan and they can advise you whether or not you are likely to succeed and this can be a safer way to apply

4. Lease your new car – As discussed above, car leasing is most often the cheapest way to finance your new car. In fact, according to the Finance & Leasing Association, in the first 6 months of this year it was the most popular form or finance provided by dealers. When making a decision on car finance, be sure that you actually need to own your next car? If so, then the only form of finance that permits this immediately is a personal loan from a bank – remember, with hire purchase you will not own the car. If ownership is not so important, then leasing is a cheap form of finance – but you must have a good credit rating. There are many benefits with car leasing as it allows you to receive a new car every few years (although this can change, depending on the lease agreement) without the hassle of a part exchange. However, make sure that you are familiar with the disadvantages (you need to agree an annual mileage limit) and as always be sure to shop around and compare like with like on all alternative car leasing deals.

The Best Options for Your Caravan Finance

Options for Your Caravan Finance

Buying a caravan can be a great way to organise more flexible holidays and weekend breaks. It can provide you with a home away from home, with all of your creature comforts. You can travel anywhere you would like to visit, spend one night or several without needing to worry about expensive hotel accommodation or costly restaurant bills. However, unless you are in a very fortunate financial position, it is likely that you will need to consider finance to fund the purchase.

Dealership Caravan Finance:

The most obvious place to look for your caravan finance is the dealership where you are purchasing the caravan. While this can be a great place to secure automotive finance, consumers should not assume that they are automatically obtaining the best auto finance rates. The dealership may have some attractive packages, but be sure to read the small print to check for any hidden fees or charges, and compare the rates with other providers before you commit. In many cases, the sticker price for the finance options are often based on longer term loans to make the monthly charges more attractive. Although this means that your monthly expenses will be less, you will be paying far more over the term of the loan. Always check the total finance cost in addition to the APR and monthly payment estimates.

Bank Loans:

Another source of financing is a loan from your high street bank. Most banks and financial institutions advertise some great loan deals for any purpose. However, you should be aware that since the global finance crisis, many banks are reluctant to lend to those without an excellent credit record. If you have less than perfect credit, you may not qualify for the advertised rate and will be offered a less competitive deal. Again, be sure to compare any quotes to check if it is the best possible deal.

Specialist Caravan Finance Broker:

A broker can be the best way to get a great deal on your caravan finance. Reputable brokers have access to a range of lenders who specialise in certain types of finance. The broker can search for the most competitive deals, allowing you to compare caravan finance rates without needing to fill out multiple forms and applications. A broker can assist you even if you have less than perfect credit as they will have access to a number of companies with more relaxed lending criteria. The broker can assist you with the paperwork, making the loan application process far less stressful and frustrating.