Veterans Business Resources

a portal for all Veterans and SDV Small Business Owners

Credit Reports, How Important Are They?

Credit has, by far, become one of the most misunderstood facets of our modern society. Many of us get off to the wrong foot with credit early in life and sometimes never recover. Some of us believe it will eventually go away; not realizing it is a permanent file.  Some people apply for a loan and hope the lender does not notice the bad things on their report. I suggest that this subject be taught somewhere in high school or college. We truly need to get the word out about the “very large” role credit plays in our lives.

As a small business counselor, I have seen firsthand how the system works against you when you get confronted with this monster called “credit”. What happens to people on the business side of credit reporting is just an extension of what has already happened to them personally. What I mean is that, the questions I am asked about credit reports in my office let me know that there has been a total misunderstanding of how the system works.

Let me start out by saying the credit reporting system was originally set up for the creditors and not the borrowers. So it stands to reason that if this is a system paid for by creditors it will always ultimately protect creditors. This point alone can sometimes be difficult for many of my Small Business Development Center (SBDC) clients to come to terms with.

How does the system work? Simple. Your creditor pays a fee to be a part of the system and be able to obtain your credit file. Your file is established when you apply for credit. In nine of ten cases, your creditor then reports the basic information about your transaction. Creditors will report things such as what type of account you opened, how much money was loaned and the monthly payment amount, etc.. This information is tracked over time to establish a history. This history, in-turn is put into a formula which results in a score or ranking, if you will, of your risk. This “risk” or credit score can determine if you will be granted further credit or it can dictate how much you pay, in interest, on that credit. Simple?  Right? It can get deeper. The scoring models take many, many things into account that we don’t always think of when it comes to discussing credit. For example, when you miss a payment due date (even if for only one day), failure to make the payment on time can lower your score. Additionally, if you only pay the minimum, over time you are not only adding to the interest payments but you are keeping your balances closer to the maximum account limit, also lowering your score. And so on it goes.

The most prudent route to take when it comes to teaching yourself about credit is to visit some web sites and study the information listed about the credit reporting system. Sources include the Federal Trade Commission, Fair Issac Corporation (FICO), Experian, Trans Union, Equifax, to name a few. This information is not secret yet so many of us are uneducated on the subject. If there is ever a time to get the facts, it is now. In a very tight credit market with the banks attempting to have their way with consumers, we should always be reminded of the old saying – “He who has the gold makes the rules”.

David L. Edmonds, Director

Tarrant County College

Small Business Development Center

Major, USAF Reserve, Retired

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