Many business owners and entrepreneurs of tomorrow do not sufficiently understand that credit decisions today can have long-lasting consequences that can either enable or hinder receiving funding for growth or the start-up capital for the business of their dreams.
Most American families are living in debt and the majority of college graduates aren’t getting off to a good start when it comes to maintaining the health of their personal credit. According to a 2009 Sallie Mae study, recent college seniors graduated with average credit card debt of more than $4,100.
Smart Business spoke to Irv Ashford of Comerica Bank about the different types of credit available today, the things consumers and businesses need to know about credit to make them financially successful, and why credit matters when starting a small business.
What are some fundamental truths of credit everyone should know?
Credit is a very powerful tool that takes years to build and only a short time to destroy. Poor credit can make it extremely difficult to obtain financing for a home, a car or that next great business idea.
Secondly, like a driver’s license, credit is a privilege, not a right. While it may sound great to buy now and pay later, one must earn this privilege by properly managing credit over time.
What are the different types of credit?
The most common forms of credit, or the provision of money, goods or services with the expectation of future payment, fall in two categories:
Revolving credit. Perhaps the most common form of credit, revolving credit, like traditional credit cards, gas cards or department store charge cards, allows repeated transactions up to a certain credit limit.
Mortgages and loans. Lines of credit like car notes, home mortgages or small business loans allow the consumer to borrow money that must be paid back with interest.
How is your credit score calculated and who can review this information?
A credit score is a number representing the creditworthiness of a person or the likelihood that a person will pay his or her debts. Banks and credit card companies use your credit score to evaluate the potential risk of a loan or line of revolving credit, and lenders use it to determine who qualifies for a loan, interest rates and credit limits. More and more, insurance companies and employers are also reviewing credit scores to evaluate character and financial risk.
While most people think their credit score is based solely on the percentage of on-time payments, your credit score is actually based on several factors: 35 percent is determined by how you make your payments (on time, in full versus the minimum); 30 percent is based on your current level of debt; 15 percent is based on how long you’ve been managing credit accounts; 10 percent is determined by the establishment of new credit; and 10 percent is based on your credit diversity.
