UNDERSTANDING YOUR CREDIT SCORE & TIPS TO BUILD YOUR

CREDIT

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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

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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.

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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

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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%).

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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.

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HOW TO READ YOUR CREDIT REPORTYour 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.

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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. If you notice any hard inquiries that were not initiated by your application for a loan or credit, then call the credit bureau to let them know.

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Credit Report Codes

Frequently, the information in the report won’t be spelled out in long form, but will appear in code. Bankitis has a list of credit report codes that can help you figure out what they stand for.

What if the Report Isn’t Correct?

It’s important to check your credit report to make sure the information is accurate because so much depends on it, including your credit score.

We mentioned this a couple times already, but it bears repeating: if you find a mistake, bring it to the credit bureau’s attention immediately. The Fair Credit Reporting Act says the credit bureau must correct inaccurate information in your report. They will investigate and confer with the creditor about any disputes.

Is My Credit Score on My Credit Report?

Your credit score is NOT part of the free credit reports provided by the nationwide credit bureaus. However, you will usually be offered the option to purchase the information regarding your credit score for a nominal fee, or you can use sites like Credit Karma to receive your free credit score.

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HOW TO DISPUTE SOMETHING ON YOUR CREDIT REPORTWe’ve talked before about how important your credit history and credit score are, both in your business and your personal life. Without good credit, it’s very difficult to get approved for a credit card, a loan, or receive payment terms from a vendor. Many landlords and employers also use credit reports as part of their evaluation process.

It is equally important to periodically check your credit report to make sure it doesn’t contain any wrong information that might be detrimental to you. By law, you’re entitled to one free copy of your report per year from each of the three major credit reporting bureaus. Many experts suggest getting them at four month intervals so you can cover the entire year. You can order your free credit report online at www.annualcreditreport.com or by phone at 1-877-322-8228. (You’re also entitled to a free copy of your report if you’ve been turned down for a credit card or loan.)

What To Look For on Your Credit Report:

• Payments reported as late or missing that weren’t• Accounts listed as open that you’ve closed• Accounts that don’t belong to you• Incorrect names or other identifying info• Bankruptcies reported after ten years• Other negative credit info reported after seven years

If you find a mistake, it’s on YOU to contact the credit bureaus to let them know. You can do this online, in writing, or by phone.

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How to Contact the Credit Agencies With a Correction

Equifax Credit Dispute Contact

Online: https://www.ai.equifax.com/CreditInvestigation/home.action

By telephone: 1-866-349-5191

By mail: P.O. Box 740256, Atlanta, GA 30374. You need to print and include this information form.

Experian Credit Dispute Contact

Online: http://www.experian.com/disputes/main.html

By telephone: 1-888-EXPERIAN

By mail: P.O. Box 4500, Allen, TX 75013. You’ll need to include your full name, date of birth, Social Security number (if you don’t have one, note that), all of your addresses for the last two years, a copy of a government issued ID (like a driver’s license or state ID card), and a copy of a utility bill, bank, or insurance statement. List each item on the report that you think is wrong, the account number, and the reason you feel the information is incorrect.

Transunion Credit Dispute Contact

Online: https://dispute.transunion.com/

By telephone: 1-800-916-8800

By mail: P.O. Box 2000, Chester, PA 19022. Include your TransUnion file number, Social Security Number, date of birth, current address, company name of the disputed item, account number of the disputed item, the reason for the dispute, and any corrections to your personal information such as your address, phone number, etc.

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What Happens When You Initiate a Dispute?

The Fair Credit Reporting Act says the credit bureau must investigate and correct any inaccurate information, which will usually happen within thirty days. The bureau presents your claim to the creditor that provided the information. The creditor then has to look into it and report back to the credit bureau. If the information does turn out to be wrong, they have to notify ALL of the major credit bureaus so your file can be corrected.

If you initiate the dispute online, you’ll have a tracking number so you can log in and check the progress of your case. If you do it by mail or phone, keep records of who you speak with or any correspondence you receive. The bureaus recommend you hold off on applying for new credit while the dispute is pending.

Regardless of the outcome, when the investigation is complete, you’ll get the results in writing. If you still have a dispute after the investigation is done, you can ask for a statement of the dispute to be included in your file and in future reports.

What’s the Best Way to Dispute Something on Your Credit Report?

Disputing online is definitely the easiest, but some experts recommend filing your dispute by mail, as not all online forms have enough space for all the information you might want to present. They also might not allow you to provide the backup information you need to make your case. Furthermore, some online dispute forms have arbitration clauses that say you must forfeit your right to sue if the credit bureau does something wrong.

Guidelines for Filing a Credit Dispute by Mail

• Keep it simple. Include everything you need to, but stick to the facts using clear language. Now is not the time to trot out legalese or try to be fancy.

• Send a separate dispute letter for each incorrect item rather than combining them.• Include copies of whatever evidence you have, whether it’s a Social Security card showing

your correct number, a canceled check showing a payment was made, bank statements, or anything that substantiates your claim.

• To expedite things, send a copy of your dispute to both the credit bureau and the lender, collection agency, or whoever furnished them with the incorrect data.

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• Send your dispute by certified mail so you have proof it was received.• Use our credit dispute templates as a guide (see below).• Finally, don’t give up! If your dispute is valid and the error continues to be reported by the

credit bureaus, consider taking the case to an attorney. The Fair Credit Reporting Act was set up to protect you in these situations, and you do have legal recourse.

Sample Credit Dispute Letters

Use these letters as a guide, but make sure to personalize them to your circumstances and information. Also make sure to check the lists above to see what additional information each credit bureau might require.

Sample Letter to a Credit Bureau to Dispute Inaccurate Information:

DateYour NameYour AddressYour City, State Zip Code

Credit BureauBureau AddressBureau City, State Zip Code

To Whom it May Concern,This letter is to inform you that you are reporting inaccurate credit information about me,

and to officially ask that you open an inquiry into the matter and update my credit profile with the correct information.

It would be detrimental to any future credit applications if this incorrect information persists (or ... because of this inaccuracy, I was recently denied for xxxxx), so I would appreciate this being taken care of as quickly as possible.

The error is xxxxx (succinctly explain the problem, whether it’s a payment that wasn’t credited properly, an account that doesn’t belong to you, a bankruptcy that should have been removed, etc.).

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I am attaching the following proof, xxxxx (a copy of a canceled check, a bank statement, a copy of the court order, etc.).

The error is with Name of Credit Card, Bank, Etc. - Account #xxxx xxx xxxx.

Please investigate and delete this detrimental information. Thank you in advance for your efforts.

Sincerely,

Your SignatureYour NameSocial Security #xxx-xx-xxxx

Attachment included

Sample Letter to a Creditor (e.g., a bank or credit card company) to Dispute Inaccurate Information:

DateYour NameYour AddressYour City, State Zip Code

Credit Card CompanyCredit Card Company AddressCompany City, State Zip Code

Re: Acct #xxxx xxx xxxx

To Whom it May Concern,

I recently received a copy of my credit report from xxxxx (name of credit bureau), and was surprised to see that you reported xxxxx(whatever the incorrect information may be, whether 30 days late, a wrong amount, a missed payment, etc.).

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Not only is this not the case, but according to the Fair Credit Reporting Act (FCRA), you are required to notify me when negative information such as this is listed, and I have not received this notification.

I am disputing your claim with the credit bureau and am officially requesting you to open an investigation into this matter.

Attached please find the following proof, xxxxx (a copy of a canceled check, a bank statement, email payment confirmation, etc.).

According to the FCRA, you have 30 days to look into this and respond to my request. If you don’t respond within that time, you must remove this negative information.

Thank you in advance for your efforts.

Sincerely,

Your SignatureYour Name

Attachment included

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HOW TO BUILD YOUR CREDIT You get it—having good credit is extremely important. So, how do you get it?

Getting started with credit may seem a little tricky because, as we’ve learned, you generally need to have it to borrow money or get a credit card. There are ways to begin, however. Build-ing your credit is a marathon, not a sprint. It won’t get better unless you work on it! Here are 12 Tips for Building Your Credit. Some of them may apply to you while others may not. If you have questions about any of these tips, contact your Accion Loan Officer or a nonprofit credit coun-selor.

1. Pay your bills on time. Your payment history includes any bills you pay late or skip altogether. This makes up the larg-est portion of your FICO score—about 35%. Automating your payments is a great way to stay on time with your payments.

2. Keep your credit card balances low. If you need to revolve a balance on your credit card, keep it at a maximum of 30% of your total credit limit or it will negatively impact your credit score.

3. Dispute errors. It’s true, mistakes happen. Luckily, you can dispute errors you find on your credit report through Equifax, Experian and TransUnion—the three consumer credit reporting agencies in the United States. Monitor your credit report regularly to ensure the dispute was either re-solved or is listed as “in dispute.”

4. Check your credit limit on your credit report. Sometimes issuers fail to report credit limit increases, which can make it look like your card is

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maxed out each month. If you find this to be the case, give your card issuer a call to correct it.

5. Raise your credit limit. Ask your creditors to increase your limit. Only do this if you can trust yourself to maintain re-sponsible spending habits. And again, remember not to allow your balance to exceed 30% of the credit limit.

6. Don’t close your accounts. It’s optimal to have 2-4 revolving accounts open, preferably those accounts that are the oldest. If you feel that you need to cancel some of your accounts, it’s better to cancel store credit cards. Keep in mind that canceling an account will decrease your available credit, which can hurt your credit score.

7. Avoid excess inquiries. Inquiries are added to your account every time you apply for credit. Try to limit these to 2-3 per year.

8. Mix it up. There are different kinds of credit. For example, you might take out a small personal loan from the credit union to buy a piece of furniture or appliance on installment. This diversification could provide a modest boost for your score.

9. Avoid consolidation. It’s tempting to consolidate all your credit payments onto one card. Do this only if you will save a significant amount of fees and interest, otherwise you may lose out on credit availability, which can lower your score.

10. Pay your balance every month. When you can, pay the full balance of your credit cards every month. By living within your means you can avoid paying interest. At the very least, always pay your minimum amount due.

11. Get a secured credit card. If you don’t qualify for a credit card, ask your local bank about a secured credit card. This will help build credit.

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12. Track your progress. Create an account on one of these free websites to check your credit score progress: CreditKar-ma.com, CreditSesame.com, or Credit.com.

*These tips were gathered from a variety of sources and are for educational purposes only.

How do you increase your credit score?

Once you’ve gotten a credit card, be careful and smart with it! Pay your bills on time—all of them, all the time. Even being a few days late can have a major impact on your credit score. Consider setting up automatic payments from your checking account so you know you’ll never be late. You can choose to pay the monthly minimum, pay the entire balance due, or pay a set amount each month.

Keep your debt low. Don’t go over your credit limit. Even better, try to keep your balance to less than 50% of your credit limit; 30% is even better for a more favorable rating, while 10% or less is ideal.

Pay at least the minimum amount due each month, but more if you can. Don’t overextend yourself. Don’t skip payments.

If you absolutely have to miss a payment, choose carefully. Missing an auto loan or mortgage payment will hurt your credit much more than skipping a credit card payment. Always try to make at least the minimum payment due, however.

If you do mess up, you might be able to get a late or missed payment taken off your record. Call the company and ask. Sometimes a creditor will delete the information out of goodwill, espe-cially if you’ve been a good customer for a while.

Keep an account open even if you don’t use that card anymore. Your credit score is calculated, in part, by how much you owe compared to how much credit you have available to you. A card that has no balance helps with this calculation. It also reflects well on you to have longstanding accounts, whether or not they are currently active.

Don’t use too many accounts. One of the factors in your credit score is how many of your cards have balances. Instead of spreading your purchases around between a few cards, concentrate

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on one (preferably the one with the lowest interest rate). Pay off any cards with small balances and get them out of the way.

Having and successfully paying off an installment loan (a loan paid in set installments over a particular period of time, such as a microloan or mortgage) will raise your credit score.

Don’t let past slipups mess you up going forward. Get current and stay current. Older problems don’t carry as much weight as your more recent history, so the longer you keep your track re-cord clean, the higher your score will go.

Protect your personal information carefully to prevent identity theft, which can put your credit information in turmoil for a long time. Guard your Social Security number, your credit card numbers, and your bank account information. If someone is able to fraudulently open a credit card account in your name and then doesn’t pay the bills, the delinquent account will be re-ported as yours on your credit report. Getting your credit cleaned up and corrected can take considerable time and effort.

Keep track of your score by taking advantage of those free annual credit reports you’re entitled to, and make sure they don’t contain any wrong information that could hurt you.

CONCLUSIONNow that you know the ins and outs of credit, you’re ready to build your credit score and be one step closer to securing the loan you need to grow your business.

Still have questions? We have plenty of other articles on credit, loans, and everything in between. Feel free to contact us anytime. Good luck!