Credit Defined • When someone lends you money, and you pay them back with interest, they have “extended you credit.” • Credit is the ability to borrow money and manage it responsibly. • Buy now, pay tomorrow.
Why is it good for my small business? Credit helps a business: • Grow • Buy inventory • Publicize its goods and services • Buy equipment • Obtain working capital
Cost of Credit • Principalis the amount of money you are borrowing. • Interest is the amountthe lender charges you to let you use their money. It is a percentage of the principal (charged per year, month, or week.) • Feescover the lender’s costs to review your credit application or to service your account (maintenance fees, service charges, late fees) • Example: You need $5,000 to buy equipment for your business • Principal $5,000 • Interest 10% ($500 if you pay in one year) • Maintenance Fee $100 • Total cost of the loan: $500 + $100 = $600 (paid in one year)
Cost of credit (continued) • Interest Rate • With an annual interest rate of 10% instead of 25%, you are saving a total of $7,294!
What is a Credit History? Your credit history is a record of how you have paid your credit card debt and other loans in the past. Why do lenders want to know how you have paid your debts in the past? Because they assume you are likely to behave in the future in a similar way to how you have behaved in the past. If you paid your debts well in the past, you will also pay well in the future! In sum, your credit history is like a report card on how you use credit. The better your credit history, the better chances of getting credit with lower interest rates to finance your business!
Who Stores Your Credit History? The three biggest credit reporting agencies that keep records of your credit history (your credit report) are: • TransUnion: 1-800-888-4213 or visit www.transunion.com • Experian: 1-888-397-3742 or visit www.experian.com • Equifax: 1-800-685-1111 or visit www.equifax.com •~• Each year you can request 1 free credit report from each agency at: www.annualcreditreport.com or by phone at 1-877-322-8228 You will need to pay a nominal fee for each additional report or to see your score.
Why is a credit history important in the U.S.? Your credit history is reviewed by many different groups to evaluate your financial behavior. Among those who will check your credit history are: • Landlords • Employers • Banks • Insurance companies • Cell phone companies • Mortgage lenders
What is the cost of not having a credit history? • As we mentioned before, it will be difficult to expand or invest on your business if you don’t have access to credit! Besides the cost to your business, there are other personal costs of not having credit: • It may be difficult to get a job. Without a job you will have no source of income! • You may have to pay a higher deposit to move into an apartment and in some cases you may not be able to rent • You may be charged higher interest and fees on loans and credit cards • You may have to pay a higher deposit to get a cell phone or will have to use a prepaid phone
What is included in my credit report? Credit reports include: • Personal info • Judgments • Trade lines • Inquiries Credit reports do not include: • Ethnicity • Income • Marital Status • Immigration Status • Medical History* * If you DON’T PAY your medical bills, medical collections do appear on your report!
New Credit 10% Payment History 35% Amounts owed 30% 15% 10% Types of Credit Used Length of Credit History What is a Credit Score? • A Credit Score is a number attached to your credit report between 300-850, with 300 being the lowest and 850 being the highest. • Credit scores take into consideration:
If there are errors on your credit report… • Request a dispute form from the credit agency. Return it with copies of all documents that support your dispute. • Or, write a brief letter explaining your dispute. • Attach supporting documentation • Include ALL specifics you have about the account • The credit report agency must verify the information you dispute, and should answer you by mail within 30 days. • If the credit agency will not correct the information, call the creditor directly to request a review of your account. • If everything fails, you are allowed to add a 100-word statement to your credit report, explaining why you believe the information is inaccurate.
Warning Signs of Credit Problems • You are at or near the limit on credit cards • You are only making minimum payments • You have recently been denied credit • You have defaulted on a payment or on your rent
How to improve my credit history? • Pay your bills on timeto protect your credit and to avoid late fees. • If you cannot pay on time, call your creditors before payment is due to explain the situation. • Get current and stay current if you have missed payments. • Recent late payments are more damaging than a bankruptcy discharged a few years ago. • The longer you pay your bills on time, the better your score.
How do I improve my credit history? • Pay off your entire bill each month. If you do, you pay zero interest and you build your credit at no extra cost. If you can’t, try to pay more than the minimum payment due. • Keep low balances on credit cards (less than 30% of your limit). Remember, 30% of your credit score is determined by how much credit you use! • Don’t open a lot of new accounts too quickly, especially if you have been managing credit for a short time.
How do I start a credit history? • Apply for an ACCION small loan to start your credit history and make all your payments on time (we report to credit bureaus). • Open a secured credit card. These are credit cards backed by money in a savings account. Use this card every month and pay it in full to establish a good payment record.
You need to build both types of credit • To strengthen your credit history you need to have experience with both revolving AND installment credit. If you only build credit with 1-2 credit cards, you will have what lenders call a THIN file. • Do you dream of buying a car or owning a house? If so, you'll need to apply for installment loans. If you do not have experience with installment loans it is likely that your lender will charge a higher interest rate and fees. Apply for an installment loan with AUSA today and strengthen your credit history!
What about business credit? Just as each individual has a credit report, so does a business. Corporations can have a business credit report, mostly through Dun & Bradstreet, which is the main business “credit bureau”. However, if you are starting a small business, you are more likely to start off as a sole proprietor (not a corporation). You need not be concerned about building business credit to sustain your business on your personal credit until your business is solidly established and has over 9 employees.
What are my alternatives for financing my small business? • Term Loan: A term loan may be best for financing the purchase of equipment, vehicles or machinery. Banks and ACCION can extend these loans. • SBA Guaranteed Loan: The U.S. Small Business Agency (SBA) sets the guidelines for the loans while SBA’s partners (banks, Community Development Organizations) make the loans to small businesses. SBA backs those loans with a guaranty. • Lease: You borrow the entire purchase price of new equipment or vehicles, plus some soft costs, such as taxes and delivery. The loan is secured by the equipment. • Line of Credit: A line of credit may be best for short-term working capital needs, or seasonal fluctuations. You are pre-authorized to borrow up to a certain amount, but you only borrow the funds as you need and you only pay interest on the money you need to use.
Thank You For Coming! If you would like more information, please contact us at: (312) 275-3000 or www.accionchicago.org