“5 Amazing Credit Hacks for New Entrepreneurs” springs from a recent presentation given by the Credit Monkey to a group business leaders in his hometown of Reading, Pennsylvania. After the presentation, one of the attendees asked the Monkey for his notes. Unfortunately, the Monkey’s jottings consisted of five short phrases scratched on a small note pad. The Monkey’s notes were not fit to give away. Instead of leaving the young entrepreneur completely empty handed, the Credit Monkey promised to write this post as a reference for all the attendees.
New Entrepreneurs Need to Borrow Money
Whether it’s cash to expand their businesses or a new credit card for personal use, new entrepreneurs need to borrow money. Unlike the punch-a-clock crowd, you as an entrepreneur face unique borrowing challenges. Sometimes the challenge revolves around an entrepreneur’s liquid assets. He may not have any, especially if they are completely tied to your business. Other times, an entrepreneur does not draw a regular weekly paycheck or has trouble showing regular income. Many entrepreneurs have little or no credit history. Regardless of the reasons, new entrepreneurs have trouble borrowing money.
If your personal challenge is your credit score, then this post is for you. In this article, the Credit Monkey gives five (5) simple hacks to improve the entrepreneur’s credit score twenty (20) to ninety (90) points in forty-five (45) days. These hacks are not wizardry, but they work just like magic. Try them out. See for yourself. They can make the difference between receiving an “I’m Sorry Letter” and a “Congratulations Letter”.
Entrepreneurial Credit Hack # 1 – Credit Piggybacking
The Credit Monkey’s first (1st) credit hack helps entrepreneurs with little or no recent credit history.
Thirty-five percent (35%) of a credit score is derived from your credit payment history while another fifteen percent (15%) of your credit score is derived from the length of your credit history. In other words, fifty percent (50%) of your credit score is determined from how well and for how long you paid your bills. If you want to learn more about the factors used to calculate your credit score, read the Credit Monkey’s post, “5 Categories of Credit Scoring”.
Conventional wisdom says, “Building a credit history takes time.” History equals time, right? Not necessarily. Credit Piggybacking creates a credit history in one billing cycle. Piggybacking is a credit history time machine. Credit Piggybacking lets you assume another’s credit history and make it your own in as little as forty-five days (45). By Piggybacking, you can add years of history and multiple accounts to your credit file without waiting years. It’s a simple hack with amazing results.
Here’s how it works. Ask a friend or relative with excellent credit if they will make you an authorized user on one (1) or two (2) of their longest held credit cards without giving you a credit card. Preferably, the credit cards should have credit limits and low balances. You’ll learn why in Credit Hack # 2. Explain to your friend or family member that you don’t intend to use account. Therefore, you don’t need a credit card. All you only want is to borrow their excellent credit history for a few months until your loan or credit line is approved.
When you become an authorized user on a credit card account, the credit card company automatically reports the card’s entire payment history to your credit history. If the credit card account is seven (7) years old, then miraculously, you get seven (7) years of credit history added to your credit file. Likewise, if the second credit card account is four (4) years old, you get four (4) years of history added to your credit report. The best parts of this hack is that it only takes one billing cycle for the history to be added to your credit file and it costs you and your friend nothing in the the process.
This leads to the question. “If one (1) or two (2) accounts matter that much, are four (4) or five (5) accounts better?” No. Don’t get greedy. Imputing someone’s credit history to your credit record is great, but it comes with some caveats. Your new lender may also consider the total amount of debt on the borrowed credit cards accounts as your personal debt. Your lender may also calculate the monthly payments from the borrowed accounts against you, reducing your potential borrowing power.
Realistically, only trusted family and very close friends consent to credit piggybacking. For the person who decides to help you, piggybacking is a great deal. Your family member or friend carries no personal liability for your new credit account(s) because he is not a co-borrower or cosigner. Additionally, regardless of how responsible or irresponsible you are with your credit, it will not affect your trusted friend’s credit because you are using the account on which you are piggybacking.
Finally, Piggybacking is a short term arrangement. A month or two after you are approved for your new loan or credit card, your friend can remove you as an authorized user from the borrowed account without affecting his credit score. It is a win for you, the new entrepreneur. You get the loan. It’s a win for your friend. He helped you without risking liability for your debts or lending you a penny.
Piggybacking can make your credit score jump as much as ninety (90) points in forty-five (45) days. Every entrepreneur with a thin credit file needs to learn this hack.
Entrepreneurial Credit Hack # 2 – Reverse Credit Utilization Improvement
Imagine bumping your credit score forty (40) points just by making a few telephone calls? Hack two (2) helps new entrepreneurs who carry balances on their credit cards improve their credit scores without using any cash.
Bankrate.com defines credit utilization as “the amount of credit you have used compared with how much credit you have been extended by a lender. This category of credit scoring does not directly relate to how a consumer pays his bills, but to his future ability to pay those bills.”
Credit utilization accounts for thirty percent (30%) of your credit score. A new entrepreneur who is mindful of that fact, can keep his credit score high. Conversely, a credit challenged entrepreneur can improve his credit utilization and bounce his score in one billing cycle.
The Monkey’s friends, Adam and Kristy (not their real names) are examples of the effect of credit utilization on FICO scores. Last week the Monkey met with the couple who want to purchase their first home. Adam and Kristy make timely payments on all their accounts and have done so for the past three years. The couple’s credit file was significantly thick. Yet, their credit scores were in the low to mid 600’s. Why? Simple. All their credit cards were either at or near their limits. Adam and Kristy’s credit utilization ratio was over ninety-five percent (95%). Their credit scores correctly reflected their high credit utilization.
The FICO credit scoring algorithm is a trade secret. Accordingly, only a few people know exactly what percent of credit utilization is considered ideal. Most experts, including the Credit Monkey, believe the ideal credit utilization ratio per account is somewhere between twenty percent (20%) and thirty percent (30%). In terms of dollars and cents, if a twenty percent (20%) credit utilization provides the optimum credit score, then a credit card with a $1000 should a balance of $200.
Logically, a credit utilization of fifty percent (50%) is better for your credit score than credit utilization of eighty percent (80%). The same logic says that a forty percent (40%) credit utilization is better than sixty percent (60%). In reality, the difference between eighty percent (80%) and sixty (60%) credit utilization may not affect your credit score at all. Experience teaches that thirty percent (30%) credit utilization score better than a sixty percent (60%) credit utilization.
Before considering the next credit hack, you should know that the FICO algorithm values each trade line individually. The FICO algorithm does not look at your combined credit utilization in total. Instead, it calculates each account separately and then weights that account against the others. That means by changing the credit utilization of one (1) or two (2) accounts you can improve your overall credit score.
Now that the foundation is laid, we are ready for the Entrepreneur’s Credit Hack # 2. There are two (2) ways to change credit utilization. The first way to improve credit utilization is to pay debt down. This is not always possible. You may not have enough cash or you need to conserve your cash for another purpose. Then what do you do to improve your credit utilization?
Credit Hack # 2 says, rather than paying down your account balance, simply increase your credit limit on your problematic credit card to accomplish the same objective paying them down. To understand that, let’s refer back to the previous example.
Your credit card has a limit of $1000, but in this example it carries a balance of $600. So, your credit utilization is sixty percentage (60%). Your credit card issuer grants your request to increase your credit limit to $2000. Now, without taking a dollar from your wallet, your credit utilization becomes thirty percent (30%). Thirty percent (30%) is within the optimum range for credit utilization and your credit score will bump accordingly.
The best part of this hack is that all it costs is a few telephone calls. All you do is call your credit card issuer and ask for an increase in your credit line. During the call the credit card issuer may request updated financial information. Other than that, it takes a moment of two.
Rarely will an issuer do a hard credit inquiry. A hard credit inquiry becomes a part of your credit record for twenty-four (24) months but only affects your score for up to twelve (12) months. You should know that a hard pull may shave as much five (5) points from your credit score the first month.
In most cases, the decision regarding your credit line increase will be made before the call concludes. That’s all there is to it. Now you either repeat the process with another credit card or go to the next hack.
Most people think only in terms of reducing debt to improve credit utilization. The credit savvy entrepreneur should think in terms of increasing credit limits before paying down debt willy-nilly. All it takes is a telephone call to request a credit limit increase. It’s fast. It’s simple. And best of all, it takes no cash out of your pocket.
Entrepreneurial Credit Hack # 3 – Low Limit Pay Down Credit Utilization
Credit Hack # 3 begins where Hack # 2 ends.
Remember Adam and Kristy, the couple discussed in Credit Hack # 2? The first thing they wanted to do after learning about credit utilization was to use a sizable portion of their savings to reduce what they owed. Wait, wait, not so fast! Reducing debt is great, but Adam and Kristy need their saving for their down payment and closing costs of their new home. It wouldn’t be wise to spend that money.
Adam and Kristy need a strategy to improve their by depleting as little of their savings as possible. That is the essence of Credit Hack # 3.
With that in mind, recall that general debt reduction may not necessarily drive up your credit score more than a few points. On the other hand, paying selective accounts often pay big dividends in higher credit scores.
In Credit Hack # 2, we learned that “[t]he FICO algorithm does not look at your combined credit utilization in total. Instead, it calculates each account separately and then weights that account against the the others.” With that in mind, strategically use your cash to reduce credit utilization ratios to twenty percent (20%) on as many accounts as possible rather than reducing all your debt.
Let’s take a closer look at the strategy that the Credit Monkey suggested to Adam and Kristy so that you too can use it. Let’s assume you have three (3) credit cards. Two (2) credit cards have $500 credit limits. Each of those cards carry a $400 balance. Your third (3rd) credit card has a limit of $5000 and carries a balance of $4000. From the previous section, you know that all three credit cards have a credit utilization of eighty percent (80%). Pay $300 on each of the two (2) lower limit credit cards. BY strategically using $600, you end up with two (2) accounts with a credit utilization of twenty percent (20%) and only one (1) credit card with a credit utilization of eighty percent (80%). That’s an improvement.
Now, take the same $600 and pay it on the high limit balance credit card. You end up with two (2) card cards with a credit utilization of eighty percent (80%). After the $600 the third (3rd) credit card account has a credit utilization of seventy-six percent (76%). Paid that way, you wasted you $600. At least it is if you intended to boost your credit score with that $600.
By paying down their low limit credit cards, Adam and Kristy get more credit score bang for fewer dollars. The same strategy applies to the new entrepreneur. Pay down lower limit credit cards first.
Wisely choosing which accounts you pay, improves your credit score and conserves your cash.
Entrepreneurial Credit Hack # 4 – Beg
The Credit Monkey’s fourth (4th) credit hack helps entrepreneurs with a single recent late payment.
A late automobile or mortgage payment can cause your credit score to plummet as much as seventy (70) points for the first three (3) months. While a recent late credit card payment can result in a forty (40) point drop. A payment is late when it is made thirty (30) days or more after its due date. That’s more than a point a day for a late payment. Ouch. That hurts.
You won’t be the first person to ask, “What can you do about a single late payment? The Monkey’s answer is always the same. “Try begging.”
If asked, some creditors will not report a late payment to the credit bureaus. Some creditors will even change late a late payment to an on time if you have a history of timely payments, can provide an excellent reason for the late payment and you beg.
In the Credit Monkey’s experience, there are few excellent reasons for a late payment. Excuses like my new puppy chewed it up won’t work. It didn’t work for you homework in high school and won’t work for a late payment in the world of credit. Neither will, “I was waiting to get paid by my customer.” The person at your lender’s call center may understand, but such excuses won’t change the status of your late payment.
Maria is from the Monkey’s hometown. She owns and operates a local small business. Three weeks before closing on her first home, her credit score dropped seventy (70) points overnight. Somehow Maria missed making an auto loan payment. Regardless of the fact that she had no other late payments in her history, her mortgage changed her mortgage status from conditionally approved to denied. Maria came crying to the Monkey, desperate for help.
The Monkey suggested that Maria call her lender and beg for a one time courtesy of not reporting the late payment. Maria immediately telephoned the lender’s call center. She explained that she was buying a new home and the late auto loan payment would disqualify her for a mortgage. Maria’s request was turned down by the first attendant at the call center. The “No” did not deter her.
Maria explained to the call center attendant’s supervisor’s supervisor that she discovered the envelope containing the check for the car payment between the seat of the car and the console. Somehow she missed it when she mailed her monthly bills. After much begging, the supervisor granted Maria a one time forgiveness for the late payment. Her credit report was changed and Maria moved into her new house less than thirty (30) days later.
Another excellent reason for a recent late payment forgiveness is an extended family emergency. The Credit Monkey knows that this reason works because he used it successfully.
After receiving an emergency telephone call from her mother, Mrs. Monkey rushed to New England to help take care of her sick father. A day or two before Mrs. Monkey returned home, her credit union called the Monkey about a delinquent car payment. Apparently, in her rush to get to her father’s bedside, Mrs. Monkey forgot to make her car payment. Upon receiving the telephone call, the Monkey explained the circumstances to the credit union loan officer and asked for the one time courtesy of a forgiven late payment if the Monkey paid the late payment and the current payment today over the telephone. The loan officer accepted the Credit Monkey’s offer. The credit union got its money and Mrs. Monkey’s credit report was clean.
Begging works when you make an occasional late payment when you have an excellent payment history and when you are persistent.
Entrepreneurial Credit Hack # 5 – Pay and Delete
The Monkey’s final credit hack helps entrepreneurs make accounts in collections disappear from their credit report.
Collection accounts are the bane of entrepreneurial borrowers. New entrepreneurs often do not know that the collection exists until after they apply for credit. Adding fuel to the collections fire, even when a collections account is paid, it still casts its shadow on a credit report for seven (7) more years. To find out why, read the Credit Monkey’s post “Date of Last Activity”.
Can anything help? Yes. Enter the secret weapon of credit repair. Pay and Delete.
Pay and delete is an agreement between a third party bill collector and a debtor (you, the entrepreneur) whereby the bill collector removes the collections blemish from your credit report in exchange for payment of the delinquent debt. It sounds straightforward. It is, but you must ask for the collection agency to pay and delete because collection companies won’t offer it.
If you do not to ask for pay and delete, the paid collection stays on your credit report for seven (7) years from the date you paid the collection. A paid collection account is better than an account in active collections. That said, the paid collection account, even if it was for just a few dollars, damages your credit score for at least two years. Without pay and delete you could effectively pay to reduce your credit score.
Always get the collection agency’s agreement to Pay and Delete in writing before paying the debt. Keep a copy of that writing for your records. It provides ammunition for a future credit bureau dispute should the collection agency fail to remove the collection account from your credit report.
For a more comprehensive explanation of Pay and Delete and how to make it work for you, please read the Credit Monkey’s post: “The 3 Most Powerful Words in Credit Repair”.
Getting the Credit You Need
Living a cash only lifestyle is an admirable goal but isn’t practical for most new entrepreneurs. Sometimes you need to borrow money. When you need a little help with your FICO score, try these five (5) credit hacks. You’ll be amazed at the difference they can make in your credit score.
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