15 Jul Why Credit Scores are Important
Why Credit Scores are Important
The first answer is a simple one:
Credit scores impact the availability and price of credit to a borrower.
In other words, the APR you pay is based on your credit score, and so are the sources who will respond when you need them.
The rest of the story is not so simple. In fact, managing your credit status to the maximum benefit of your business, and conducting that business itself at the same time, are too much to handle without expert help. People get by without that help, but rarely do they exercise the best influence they could have on the readiness and cost of the money it takes to run their business. REI has some excellent solutions for this dilemma. First though, it’s important to know the dimensions of the task.
The top level of complications that run throughout the dynamics of credit includes three key dimensions:
- Three independent agencies rate your credit.
- Each of the three agencies has a different algorithm for arriving at your score.
- The algorithms are changed intermittently, and without the awareness of the borrower.
Solid Credit is a Precarious Balance
The complexity and lack of transparency among the credit rating agencies’ algorithms is mind-boggling to those who don’t focus on it all the time. Yet one key element of those algorithms is easy to grasp. The percentage of available credit that a potential borrower is currently using stands as one key indicator of his or her credit-worthiness. Pretty obviously it’s a good idea not to be “maxed out” if you want to qualify for a favorable APR and attract productive lenders.
Yet did you know that it’s possible to rate too low on the percentage of available credit you are using? Strange but true, that if you’re not using a certain proportion of the credit available to you, that too can result in lowering your credit rating.
There is an optimal point for the percentage of available credit you use. Who could possibly know that point, when the algorithms are various and changing?
Inquiries Can be Hard or Soft
Another fairly widely-known fact about credit scores is that your score can get dinged or bumped just because somebody inquired about your rating. But did you know there’s more than one kind of credit inquiry? Or that the kind of inquiry can precipitate a different effect on your score?
First of all, the frequency of credit inquiries is a vital statistic. The more often companies inquire about your score, the more the negative effect it has on that score. The rationale is something like this: “If they are applying to these many sources, or this often, then what else might they be taking on?” So even without adding to indebtedness, just applying too often can have a negative influence.
And the inquiries themselves can be seen by the credit rating agencies as either “hard” or “soft.” Theoretically, a “soft pull” is a credit inquiry that is just to ascertain the current status of an existing borrower. A “hard pull” is a credit inquiry placed for the purpose of actually securing a new loan. A “hard pull” affects your credit rating noticeably because it anticipates adding debt.
Complications arise even here, because lenders have been known to treat even their own mid-loan status inquiries as a “hard pull,” even though they have every reason to know better. Why? Because the ding that a hard pull enacts on your credit rating may drive up the APR, they are entitled to charge you.
How to even notice this, much less avoid it, is one indication of why professional assistance is called for, if you want to be sure you’re getting the best credit available to you.
The obscure knowledge required to perform this credit-optimizing function reminds us sometimes of a movie scene in which a business manager is pitching his services to a rock-and-roll band: “Do you know how to play Cleveland without paying for the ice under the arena floor?” These complications may not be fair, but they are facts of life in business.
What You Can Do
There are just four key things a business owner can do without professional help to get on a good footing with regard to his or her credit rating.
First, borrow judiciously. People who wouldn’t even consider surgery without a second opinion often submit readily to the first credit quote provided to them. Consider the source, ask questions, and triangulate your point of view with a second or third offer.
Second, monitor your score. We’re all entitled to one free “pull” a year, and there are services worth considering that offer you your credit rating more frequently. This is the key to the third and fourth things you yourself can do.
Monitor changes in your credit rating, correlating them to your reported earnings and to the actions you know you’ve taken in the credit marketplace. By doing this it is possible to enlist the fourth tip. Get a feel for what actions benefit you and which ones do not. Taken altogether these four measures are most of what a non-professional can do to cultivate a favorable standing in the marketplace for money.
What We Can Do
What we can do at REI Commercial Capital to help you ensure that you’re getting the most favorable treatment from lenders, and the most positive consideration from potential lenders, consists of three key additional assets that we put on your side: Knowledge, focus, and insight.
What a pro can do, particularly professionals with the experience and contacts of REI, is enable you to actively manage your “capital stack.” The list of assets on your balance sheet – what you own and what you can command without owning – is the foundation for the credit you can call on. It takes training, experience, and ongoing contacts within the credit community to know what composition works best for you to seize the lowest total cost of capital.
Knowing that optimal capital stack would merely be interesting, though, unless we help put you in the position to achieve it. Some people call that credit repair, but we see it as a natural business function to arrange those assets and elements of your business posture for the most positive impact on your credit, regardless of where your score might start.
Because of REI’s resources and perspective, we offer you the ability to analyze, evaluate, and secure more favorable forms of debt, from more influential sources. The unusual combination of experience and point-of-view you’ll find at REI Commercial Capital makes us the preferred source of the money your business demands, to do what you’re in business to do. Just call us at 843-541-2966 or visit http://www.reicommercialcapital.com/ for more information. We look forward to getting acquainted.
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