NASE Blogs

Credit Headaches

Jun 23, 2009
Posted by Molly Nelson - As all small-business owners know, access to capital and credit is important to running a business. However, the economic downturn has made access almost unattainable as banks are tightening lending standards and cutting lines of credit.

According to the National Small Business Association, 59 percent of small businesses were relying on credit cards to help finance their day-to-day operations as of April, up from 44 percent at the end of 2008. Small-business owners have also been spending more on their credit cards, making up 11 percent of revenue for Visa and MasterCard today from 3 percent of revenue in 1998 according to the Nilson Report as cited by The New York Times.

Despite the large numbers of small business owners using credit cards, and the amounts they are spending on these cards, three-quarters say they have experienced a large decrease in credit limits over the last six months. Small businesses were not included in the Credit Cardholder’s Bill of Rights legislation signed into law in May by President Barack Obama. That legislation limits excessive fees and interest rate increases on existing balances beginning in 2010.

Credit card companies say they have had to restrict credit to small businesses because of rising defaults and uncertainty, but as banks cut credit limits, the credit scores of small businesses are hurt as well, making it even harder to get other types of credit.

Tighter lending standards mean higher credit scores are necessary to qualify for loans. Despite some various entertaining commercials on television, according to this Washington Post article, getting an accurate credit score is confusing and expensive.

Most lenders base your creditworthiness on your FICO score, which is calculated from information in credit reports from the three major bureaus, TransUnion, Experian and Equifax. Experian and TransUnion have developed their own “educational scores” that consumers can access by paying $14.95 per month for a credit-monitoring service, however the fine print reveals these scores are not the same as a FICO score. Equifax gives FICO scores to anyone paying $14.95 per month for its credit-monitoring service. Many consumers have found large discrepancies between the educational scores from these bureaus and the FICO score that most lenders use.

Consumers can access their FICO scores through Equifax.com or myFICO.com. While nervewracking, if you have paid your bills on time, don’t have negative public records such as bankruptcies, and have used less than 30 percent of your available credit, you probably have a good credit score.

Do you monitor your credit score regularly? Have you been surprised by differences between your educational score and your FICO score?

Hat tip: The New York Times, The Washington Post