What is Credit Attitude?
A respected lender recently confirmed that they look at ‘credit attitude’ when underwriting commercial borrowing, this is considered over and above what may be showing on the business owner’s credit report.
They consider credit attitude as a better guide to repayment than more traditional methods of assessing borrowing.
Typical Credit ‘Black Marks’
For a long time I have asked clients to ignore their ‘credit score‘, it is just a number and means very little. There is not a lender out there that will sanction or decline borrowing based on the credit score number given to you by Experian or Equifax. Credit is underwritten using all the information provided by the business, including what is on the credit report.
Credit attitude is about what happens when you borrow, the action taken after any negative events and how you manage the credit limits you have.
If you think that borrowing for your business takes your personal credit report out of the equation then you would be wrong. Lenders will invariably take a personal guarantee and want to know the person behind the guarantee, they will also look at the owner’s personal credit conduct as an indicator for how business borrowing will be handled.
To give you an example of credit attitude, these are the common things that contribute to it.
The Credit Elements
Defaults. Your credit report shows the history of all your repayments, whether they were made on time, missed or made late. It also shows whether a missed payment was bought to date. Historically a default or late payment on another loan could see you current application declined. Credit attitude is about what happens after the event, where the missed payment is made up quickly then it shows a willingness to sort things out. A one month default that remains overdue 12 months on shows a negative attitude. The bottom line is that lenders want a borrower that will do the right thing.
Credit Utilisation. How much of the available credit you have are you using. The basic assumption here is the more credit you are always using then the more dependent you are it credit to survive. This is where things differ from past assumptions, if you have credit limits but are not using them then this is less of an issue than it was. It is often thought that not using any credit is bad for your ‘rating’, credit attitude is about how you manage your finances. Using some but not all or using a little borrowing now and again is all fine.
Minimum Payments. There are few genuine reasons for defaulting on a credit agreement other than not being able to afford the repayment, even then I would refer you to the point above about resolving missed payments. If you have any revolving credit then get a minimum payment DD set up. Lenders want at least one payment to be received in every 35 day period. A minimum payment then a few regular reductions are ideal.
The combination of the above form ‘credit attitude’. It is a departure from traditional thinking, less about the black and white of what has happened, more about how things were managed afterwards.
If you are considering applying for facilities or borrowing for your business then please ask us first. We are happy for you to send your credit report over and we will run a free summary of it for you.
By Dave Farmer