Many of our clients come to us with very poor credit scores. This is a symptom of the small business owner leveraging everything they can in order to keep the operation running, including their personal credit.
While it is important to note that in the vast majority of SBA workouts, personal credit is not impacted, our clients are typically dealing with a variety of personally guaranteed debts all at once, like business & personal credit cards, commercial lines of credit, and leases.
When the dust settles post-workout, it’s entirely likely that you will need to work on rebuilding your credit score. It’s no secret that a good credit score provides multiple benefits, such as increased credit limits, competitive financing rates, and more negotiating power when taking out a loan.
So what can you do to improve your credit score? This article will focus on three tried and true strategies to boost a sagging credit score.
Secured Credit Card
A secured credit card is all but guaranteed to be approved by a lending institution, as you are completely wiping out the financial risk of the lender by providing the security, usually a cash deposit of about $500. The credit limits of secured cards are set based on the amount of cash that you’re depositing, so it’s impossible to accumulate more debt than what you’ve already pledged as collateral.
By using the card like a normal credit card, putting small purchases on it, and religiously paying them off on time, you are actively building positive revolving credit history, which indicates to lenders that you are creditworthy. Credit unions are a great place to start with these, as they will typically report your activity to all three credit bureaus, ensuring that the positive reporting shows up anywhere a potential lender may look.
Additionally, after several months of responsibly using your secured credit card, it’s not uncommon for the bank or card company to reward your good behavior by increasing your credit limit without requiring any additional cash collateral – a huge win.
All things considered, obtaining a secured credit card is probably the best first step in successfully rebuilding personal credit.
Goodwill adjustments are a little known trick in the credit world that can have a very powerful impact on your credit score.
Consider this scenario: you’ve been juggling payables to ensure that payroll clears and your employees get paid on time. You’ve done the right thing in a tough time by prioritizing payroll over unsecured debt. However, as a result, you’ve become 30 days (or more) late on one of your business credit cards. This will undoubtedly leave a negative remark on your personal credit report, weighing down your overall score.
These types of “late” marks on your credit report will haunt you for the next seven years, at which point they are finally purged. During those seven years, your ability to obtain financing will be adversely affected, as it becomes clear to any lender that you have had issues meeting your obligations in the past.
Fortunately, you have a good shot at getting rid of these negative remarks, so long as you’ve either come current on the account in question, or have settled and closed it.
The approach you’re going to utilize is known as a “goodwill adjustment”. Essentially you are going to use the power of persuasion by writing a detailed letter to the creditor and requesting that the negative remark be erased from your credit report.
Here are some things to keep in mind when writing a goodwill adjustment letter:
Acknowledge your actions
You want to admit that you did in fact miss the payment in question, and it wasn’t simply because you “forgot” or you were busy. Do your best to explain the circumstances, how you were doing your best to run your small business but had hit a rough patch and got behind on a few obligations.
Remember that a human being will eventually be reading your letter. Appeal to their emotions by striking an honest, polite tone. Recognize the fact that this creditor had at one point extended you credit, allowing you to accomplish something that you wouldn’t otherwise been able to.
Emphasize the good
If you were only late during one stretch of time, whether it’s 30 or 90 days, and have since caught up, be sure to emphasize this point. Your recent positive payment history is proof that you’ve straightened things out and respect the ongoing financial relationship.
If these points are not enough, you can also download this excellent sample goodwill letter created by Second Wind Consultants HERE.
Be sure to mail or e-mail your letter to the creditor in question, and follow up in a week if you don’t hear anything. Be patient, polite, and persistent – it does take time for creditor’s to review these.
The term “piggybacking” refers to someone being added to unrelated cardholder’s (i.e. not you or your business) account in good standing as an “Authorized User”.
Example: Your credit score is in the 500’s, but your spouse has done an excellent job at preserving their score, which is currently a 750. Your spouse has one credit card in particular that she’s had for five years, has never missed a payment, and always pays in full. Having your spouse add you as an Authorized User on that account will automatically add all of the past, present, and future payment history of that account to your personal credit report, which will significantly boost your credit score.
Beware, this is a double edged sword. In the example above, if the spouse becomes 30 days late on the account, that negative remark will also follow the Authorized User. Likewise, if the Authorized User has access to the credit card on the account they were just added to, their spending and payment history affects the original cardholder, good or bad.
If you have a close family member with excellent credit, consider asking them to add you as an Authorized User. Be aware that this is a very generous thing for someone to do, so treat this with the respect it deserves.
In conclusion, there are multiple avenues for one to pursue when rebuilding credit. It’s best to utilize all of these options at the same time for the best and fastest possible results. Stay persistent, be polite when dealing with creditors, and have patience throughout the entire process.