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It Can Be Tough to Figure
Out the Score
We wrote recently that building and maintaining a good relationship with your banker is a crucial strategy for beating the credit crunch. Relationships are important, but bankers also value numbers, and the most important number for credit is your personal and business credit score. The FICO scorecard (created by the Fair Isaac Corporation credit analysis firm) is the number most bankers use to determine whether they want to lend you money. It estimates the risk that you will default on a payment, generally within the first three years of a loan. Your score is based on your history of borrowing and repaying money, and the national median score is 720. The highest possible score is 850.
Credit scores are often a mystery to most people. The Fair Credit Reporting Act gives you the right to view your credit report for free, but such reports generally do not have your FICO score unless you pay to have it included. The Wall Street Journal recently reported that several Internet sites—including Credit.com and CreditKarma.com—now allow individuals to check their credit score free of charge, but these sites appear to have their share of problems. Both of them require you to divulge personal information, including Social Security numbers, to get your score, and to also send you targeted offers based on your credit profile—and the score you get may not be the information your lender uses.
In fact, Fair Isaac has created a new credit-scoring model, called FICO 08, which reportedly places greater emphasis on scoring borrowers who fit into the sub-prime category. One reported change is that it will give a higher score than previously to borrowers who have only one account in arrears, and a lower score than before when multiple accounts are late. A further complication is that the three major credit bureaus (Equifax, Experian and TransUnion) continue to pursue their own scoring system, called VantageScore. Fair Isaac has sued the three and the VantageScore Company, accusing them of unfair practices to harm the FICO brand. Even so, FICO 08 is expected to be in the reporting mix for the three bureaus this year.
No matter how the score upheaval shakes out, there are practical steps you can take to improve your credit score under any rating system. Above all, don't pay your credit card or installment debt late. Keep from using more than 50% of your credit limit on any one credit card, even if you pay monthly. Despite all the offers you constantly receive in the mail, resist the temptation to close one account and consolidate debts on a new one—the older your average account, the better your score—and limit your credit card total to no more than five.
A final caution: no matter what method you use to secure it, knowing your credit score beforehand can make bank loan process much easier. The modest expense is worth it when your firm's finances could be at stake.
Ed Poll
lawbiz.com
800-837-5880
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Law firms today are moving toward operating in a more businesslike fashion, rather than just as a group of professionals—and those that are truly businesslike will recognize that a key to responsible management is establishing a strong banking relationship. Importantly, banks are looking for profitable new niches so law firms and banks are natural allies in today's competitive world.
When you have the right relationship, a good banker will be creative in helping you become aware of opportunities to grow your business in ways you didn't know existed.
Click here to purchase the 60 page soft cover book for only $29.00
What Readers Are Saying...
"The practical steps that Ed Poll provides in this little volume cover everything from how to choose a bank that's right for you, to how to improve your credit score and how to negotiate the best commercial loan to meet your needs."
"This LawBiz® Special Report is a must-read if you want to take your law firm to a higher plateau."
-Howard Putnam, Former CEO of Southwest Airlines and Braniff Airlines
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