By Steve LaBate
Whether you are a DC already running your own practice or a chiropractic student with the same aspirations, building a strong personal-credit history is essential. While business and personal credit are distinct, and thus scored separately, for small-business owners, personal credit works in tandem with business credit.
Business or Personal?
“Even with good business credit, an owner still needs to supply the bank personal-credit information, especially if the business is new,” says Sukhi Sahni, senior communications manager at credit card giant Capital One. “On theother hand, if a business has a low credit score but the owner has a good personal credit score, the bank may consider the latter when deciding on a business loan or credit-line request.”
And that can certainly come in handy if you are trying to make renovations on a new office space or invest in pricey equipment like an X-ray machine or a set of high-end chiropractic tables. To ensure you will be able to get everything you need to run a successful practice, proving that you are a responsible consumer in terms of your personal financials is key. “It’s intertwined,” says Michele Cacdac-Jones, senior director of communications and PR at credit-reporting agency Equifax. “How well you manage your personal finances is an indicator of how well you’ll manage your business.”
So what specific steps can you take to ensure you are on the right path? Many people think that simply paying their bills on time and not wracking up debt is the best way to achieve a high credit score—and they are right. These two points are more than half the battle (roughly 65 percent, according to Cacdac-Jones), though there are several other factors to consider. But before getting into what determines the remaining 35 percent of your score, it’s important to cover a few basics.
First, there are three national credit-reporting agencies—Equifax, TransUnion and Experian. Each uses the standardized FICO scoring model and the information in your credit file to independently calculate your credit score. Inside your file, you will find personal information (for identification purposes), a record of credit inquiries with notes about companies that have reviewed your credit within the past two years, a detailed analysis of your trade lines—industry-speak for your various credit accounts (bank cards, auto loans, mortgages, etc.)—and any collection information on record (including judgments, tax liens, bankruptcy and debts turned over to collection agencies). Under the Fair Credit Reporting Act, you have a right to see what is in your credit file, and are entitled to three free reports each year, one from each agency. “Collectively, the different scores paint a pretty clear picture of how you’re doing,” says Cacdac-Jones. “If you’re doing well on one score, you’re very likely doing well on others.”
Still—because they only provide a snapshot of your credit at a given moment—she recommends you check your score at least three times per year, spread out the reports as much as possible, and make sure you are getting them from all three agencies. It is possible that there is an error, or that a creditor or lender may not be reporting their information to all three. With Equifax headquartered in Atlanta, TransUnion in Chicago and Experian in Los Angeles, the agencies are predisposed to a slight regional bias. “Whichever agency is more popular in a given region tends to give lower scores in that region,” says former Bridge Capital mortgage broker Dave Schavone. “That’s because the little things like unpaid parking tickets and bounced checks usually only get reported to one agency.” These are some of the most common factors that lead to varying scores.
Now about that missing 35 percent—where exactly does it come from? The next biggest chunk of your credit score—after paying on time and not piling up debt—is the type of credit used. What kinds of accounts you have and how many of each can represent up to 15 percent of your score. “If you had a whole bunch of retail credit cards,” says Cacdac-Jones, “that might not be ideal. It’s better to have a variety.”
Roughly 10−12 percent of your score is determined by how much new credit you have—how many recently opened accounts in relation to the total number of accounts in your file, and how many recent requests you’ve made for credit. “A lot of people don’t understand that inquiries do have an impact,” says Cacdac-Jones. “If you are constantly applying for credit … and it’s spread out, that could have a negative impact. Say you’re shopping for a car, and you’re trying to find the best place to get financing, and you apply at a lot of different places—it’s better to be organized and do that within a short period of time, say a week or two, rather than all at once, because, typically, that will not have an impact on your score.”
The rest of the credit-score equation is comprised of smaller pieces, such as length of credit history, or time lapsed since activity on an account. With credit cards, a common question is whether it is better to keep or shut down a card that you no longer use very often. If it is a longstanding card, most of the time it is better to keep it open. “It shows you’ve had active credit for a long time, and that you’re a responsible consumer who’s been able to build a credit history,” says Cacdac-Jones. “If your other accounts are newer, and you shut the old one down, it shortens the length of time [on record that] you’ve had credit, and that could [negatively] affect your score.” (That said, just keeping the old account is not enough; you have to use it once in a while so it stays active.)
As one would expect, things like race, religion, national origin, age and marital status never affect your credit score. But—surprisingly—neither do salary, occupation or employment history. Says Cacdac-Jones, “It doesn’t matter if you’re super wealthy or if you’re poor.”
10 SIMPLE STEPS TO BETTER CREDIT
Consulting with Cacdac-Jones, Sahni and Equifax media relations director Demitra Wilson, Today’s Chiropractic LifeStyle has compiled the following list of simple steps DCs can take on the road to a better personal credit score and, hopefully, a more secure and successful practice.
n Pay your bills on time. A no-brainer, but always your first priority when it comes to credit. The later you are (and the more often you are late), the greater the potential negative impact on your score. Never let your bills go to collection.
n If you don’t have any accounts, find the right option and apply. You have to use credit to build credit.
n Keep longstanding credit cards open, keep them active by using occasionally and manage them responsibly.
n Keep low (and even zero) balances on some accounts. Too many accounts with high balances affect your credit score negatively.
n Keep balances on credit cards and other revolving credit at less than 25 percent of your total credit limit.
n Borrow or charge only what you are capable of paying back.
n If you are having trouble making ends meet, contact your creditors and see a legitimate credit counselor.
n Pay off debt rather than shifting it to other accounts.
n If you have had problems in the past, re-establish your credit history by responsibly opening new accounts and paying them off on time.
n Monitor your credit reports regularly to make sure there are no errors or fraud. And if you’d really like to step it up, for a monthly fee, each of the three agencies offers 24/7 credit monitoring.
Follow these 10 steps diligently, and the experts say you’ll eventually see a positive impact.
For more information, visit help.equifax.com