Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.
I’m not sure what actions Einstein was referring to, but one of the dumbest things we humans do today is forget to check on our credit reports. The potential for harm and misinformation within a credit report is huge—you exist electronically in places you didn’t even know existed. There’s a lot of financial information floating around about you and your business, and you are the only one who can ensure its accuracy.
“Credit reporting” is really a misnomer, it should be called “subjective data compiled about payment habits of individuals by disinterested creditors.” But that doesn’t roll off the tongue quite as well. Granting credit used to be a personal experience, but now the decision to grant you credit (or not) is made every time you swipe a credit or debit card, refinance a mortgage, deposit a cheque, and so on. According to a report from https://www.crediful.com/ – each of these transactions are recorded in a data bank of debt repayment encompassing any credit granted to you—including credit cards, car loans, mortgages and any public records of litigation or security registered against your assets to ensure repayment.
Every time you make a payment recorded by a credit granter, such as a credit card company, that payment is noted as paid on time or not. The information is then sent to the credit reporting clearinghouse, which updates your file, thereby painting a picture of your creditworthiness based upon payment history. If you’re late in paying your credit card bill, that’s noted. If you’re late a few times over the last year, that’s also noted. The picture that emerges is solely based on your ability to get your payments in on time—not on your net worth. You might be worth billions, but if your payments are received late, your credit report will indicate a credit risk to lenders.
Your credit report evaluation, in the form of a “Beacon Score” or “FICO score,” is the product of a statistical model calculated by computer software which determines whether you are a good risk or a bad risk. Everyone starts out with a perfect score of 1000. If you have a few credit cards, that’s okay, but if you have dozens of credit cards, your score drops.
Now say you refinance your mortgage through a mortgage broker, who shops your deal to a dozen prospective lenders. Each lender pulls up a credit report, and their enquiry is noted on your report. A high number of enquiries is bad, according to the model, so your score drops again.
Perhaps you guaranteed your child’s student loan. If he or she defaults, the bank may sue you for recovery of the loan principal. That litigation is also noted on your credit report, so your score drops yet again.
None of these situations necessarily mean that you are making late payments, yet your credit score has dropped significantly. If it drops below 600, the statistical model will tell your lender that you are statistically likely to default on your loan.
Such a situation would make it difficult to secure a loan personally, but may be even more upsetting if you’re a business owner. As an owner, you will often be asked to personally guarantee any business financing for which you apply. In order to support such a guarantee, a lender will invariably refer to your credit bureau report—yet another reason to make sure it’s in order and accurately reflects your ability to repay your debts.
Equifax and TransUnion are the two major credit reporting agencies, and you should check your report with them periodically. You can access your reports easily online.
After finding your report, read it. Look at the number of credit enquiries. Who’s making them? How many have been made over the past 12 months? Are they legitimate? Look at your accounts. Are they correct? Is your payment history correct? Look at the public information, is it correct?
If you find inaccuracies, you will have to send proof of your claim to the credit reporting agency and wait for them to rectify it to your satisfaction. You may have to enquire several times before they respond, so keep copies of everything you send and be persistent.
You can also submit a 100-word statement to be appended to your credit report. You might use this statement to explain that your written-off credit card debt is because of identity theft, and shouldn’t have been reported at all. Or perhaps you’ll state that the car loan being reported as late was actually paid off months ago, but credited to the wrong account. Every effort at accuracy helps, especially in something this important.
Lastly, when accessing credit, particularly business credit, it is prudent to meet face-to-face with a decision maker at the lending institution. Meeting with a branch manager who can attest to your creditworthiness based on a personal interview and documentary support will greatly assist you in securing your loan. Credit reporting is not a perfect system, but it generally works, and you now have the knowledge to make it work as well as possible for you. All that remains is for you to take action.
Sid Karmazyn, Chartered Accountant
905.771.3813
skca@idirect.com
