Business Credit Cards: Good for Business?

When someone is business credit card shopping it pays to shop around. This is because the credit cards are managed by the credit card company and not the institution. The financial institution may have their name on it, but that’s just branding. I spent 15 years as a branch manager working with businesses. At no point in my career could I call the credit card company with which we were affiliated to ask them for concessions for a business client. Once in a while I could get a late fee waived, but as far as personal guarantees, interest rates or credit lines, I had no say in that. Rates and lines of credit are determined through a matrix that combines the credit rating of the business owner with their ability to pay from the business’s income.

Yes, they are looking at the personal credit rating of the owner, not the business. I could not tell you how many times I have had business owners, even those who are just getting their business started, tell me they want a business credit card based on their business without having to give a personal guarantee. Sure, Microsoft or Ford Motor Co would not have to qualify based on their personal credit rating. But these are sophisticated and dynamic multi billion dollar businesses. A sole proprietor or small S Corp owner in a business with a gross annual revenue of less than a million dollars who applies for a credit card would absolutely be judged for credit based on their personal credit scores. These constitute the majority of small businesses in the country. (In a 2007 economic census, there were 6,049,655 businesses in our country. Five and a half million of those had less than 20 employees.)

Small banks and credit unions contract with large card issuers from Bank of America, Chase, Citi, Card Member Services, etc. These institutions are referred to by the card issuing companies as “Member Banks” or “Member Institutions.” The card issuers work with their member institutions to negotiate underwriting criteria, terms and rates for the new branded card. As a general rule, your branch manager, that manager’s regional manager, and most likely the district or retail VP in charge cannot change the terms of a business credit card.

Financial institutions can change issuers and negotiate a better overall card program if they are not happy with the deal they have from their present issuer. Today there are fewer issuers due to consolidation in the business. Bank One was a major card issuer with member banks all over the U.S. Now, they are part of Chase. MBNA issued millions of cards nationwide for years and now is part of FIA that is owned by Bank of America. With fewer issuers, it is hard to get a good deal and harder to negotiate because of narrow competition. Due to the volume of credit cards issued by credit union card programs, CU’s can often negotiate some very good deals for their members.

The small business owner’s best bet is to shop on the Web or shop their credit union for the best deal. There are a variety of low cost card issuers with which credit unions work; often offering smaller fees and slightly better rates. As credit unions are not for profit businesses without shareholders clamoring for higher profits, they can negotiate good deals for their members. Small business owners will not be able to avoid the personal guarantee requirement, but they can look for a card that best suits their business’s needs.

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Our next free financial workshops:

Credit Myths and Repair Workshop  Free - Open to the public

Wednesday Jan. 23rd at 6:30 PM at the Meriwest Credit Union Main Office 

5615 Chesbro Ave

San Jose CA 95123

Please RSVP with gmeyer@meriwest.com  or call at 408-365-6328

Tax Law Changes and Updates for 2013 - Open to the public

Saturday Feb. 9^th at 10 AM at the Meriwest Credit Union Main Office

5615 Chesbro Ave

San Jose CA 95123

Please RSVP with gmeyer@meriwest.com or call at 408-365-6328

 

Your FICO Score-Mystery no More!

 

Is your FICO score a mystery to you? Don’t feel bad, most American consumers don’t know their FICO score much less how it is determined. Generally, your FICO score can vary from 300 at the lowest to a high of 900. People ask me, “Hey, Credit Union Guy, what’s a good credit score?” Today, a good score would be in the neighborhood of 740. At this level you can access good rates on car loans, home financing, and credit cards. Go below 740 and you may find yourself paying higher rates of interest on your loans and credit cards.

“What is a FICO?” FICO is an acronym for the Fair Isaac Company; the company that invented the calculations that result in a measurement of credit risk. The score is determined by an algorithm. In a sense, it is a highly complex algebra problem that takes into account your payment history, the ratio of your loan and card balances vs. your available balances, the length of your credit history, your credit request inquiries and the types of credit you are managing. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac.

“Why does the FICO score exist?” In the old days of lending, loan managers looked at the physical credit report for a person and made a judgment call on the risk involved with making a loan to that person. Back then, two loan underwriters might look at the same report and have very different opinions on the applicant’s payment history. Credit Scoring took the judgment call out of the process. A person either scored well or they didn’t. Another reason for FICO score is volume. As our population grew and more people started using banks and credit unions, the loan volume increased significantly. In order to speed the loan process, the FICO score was used. Loan processors can input a minimum of data and get a score for a credit decision rather than reviewing the entire credit report.

Here is an approximate breakdown of how it is determined:

·   35 percent of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.

·   30 percent of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have that have maxed out lines, the lower your score will be. The rule of thumb is to keep your card balances at 30% or less of their limits.

·   15 percent of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.

·   10 percent of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are the worse for your credit score. FICO scores only count inquiries from the past year.

·   10 percent of the score is based on the types of credit you have. The number of loans and available credit from credit cards you have makes a difference; installment loans vs. revolving lines of credit. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the credit decision.

Questions? Ask the Meriwest Credit Union Guy at gmeyer@meriwest.com.

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The next Meriwest Credit Union Financial Education Workshop will be our Reality Based Budgets Workshop for teens and college students on Wednesday, Nov. 28th at our Monta Loma Financial Center in Mountain View. This workshop takes through a post college money management simulation where they are given a salary, rent, car payments, and other bills and build their living budget. 

Our Monta Loma Financial Center is located at the corner of Rengstorff and Middlefield  Road in the Monta Loma Shopping Center. The program begins at 6pm. We hope you can join us. Please RSVP at our Events Link.

 

Qualifying for a Home Loan - Jumping through the Hoops

As a recovering banker and branch manager who has processed hundreds of home and consumer loans over 30 years, I would like to provide my readers some insights into loan qualifying for a standard conforming home loan of $417,000 or less. If you have not checked lately, the approval bar for loan qualifying has been raised over the past few years. The first adjustment to the bar was on credit qualifying. The credit score required for a typical home loan five years ago was 680. That was the score everyone was shooting for. Today, that can be 720, 740, or even higher depending on the underwriting standards to which the borrower is being held. Each financial institution sets its own criteria based upon their risk tolerance.

The next criteria we will look at is the borrower’s income. Do they have enough to make their loan payments and other obligations? Lenders use a debt to income ratio to determine someone’s ability to make their monthly payments. The ratio usually varies between 30% and 40% of monthly income; meaning that the borrower’s loan payments and other credit obligations should be no more than 30%-40% of their total gross monthly income. If someone is at or below this ratio, they are in good shape for an approval. If they are over, they may need to consider a smaller house, paying off other debt, or adding a second job to improve their debt to income ratio.

We have looked into credit and income. There is a third rail in this mortgage process and that is the value of the home. Today, for the best interest rates, lenders are looking for borrowers to put down 20% of the appraised value or sales price of the home. What this gives the borrower is equity. In this case, equity is the amount of the value of the home that is not encumbered by a loan. So, if we are buying a $200,000 home, we would need to put down $40,000 as a down payment. This would mean you would be financing $160,000 and your payments would be based on that amount. Making a down payment can help with your debt to income ratio as well.

Why do lenders require so much equity? There are many reasons. There may be a downturn in the market and the lenders want to protect their loan and prevent the home from being “under-water” should a real estate market downturn take place again. If the lender needs to foreclose on the property, there is a cushion of equity to cover costs of the foreclosure process. But the main reason lenders require equity is that now the borrower has some skin in the game! In the case of the $200,000 home, the borrower has $40K invested in the home. Anyone with that sort of personal investment is not likely to walk away from the home should they have some hard financial times.

Qualifying for a conforming mortgage loan is no different today than it was ten years ago before the residential real estate bubble started. A borrower has to meet credit standards, income requirements, and the home must qualify under the loan to value ratio which is generally 80%, requiring a 20% downpayment for a standard conforming home loan of $417,000 or less.

Final Word to the Wise: This Spring, I refinanced my home with a new lender. It took less than thirty days to process my loan. Why? I provided all the documentation that was asked for up front with the application. If a borrower provides all the statements, taxes, paystubs, and other documents that the lender asks for to process the loan, their loan approval answer can be had very quickly. The thing that holds most loan approvals up is a lack of documentation. I have waited weeks for some clients to provide the required documents. If a person waits too long they may miss their window of opportunity for the interest rate. A rate “lock in” is where your interest rate is reserved for a fee paid to the lender. If a borrower is not forthcoming with the required documents in a timely fashion, the borrower may lose their preferred rate and the fee they paid for the interest rate lock in. Best advice, do your homework, research the rates, and have your documents prepared before you start getting serious.

Also, consider getting “pre-qualified” or “Pre-Approved” by your lender. Pre-Qualification will help you determine how much home you can afford, and what type of home you should be looking at. Pre-Approval will do the same, but will include a review of your personal credit. Lender’s often charge a small fee for Pre-Approvals.

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If you are interested in purchasing a home and wish to get Pre-Qualified or Pre-Approved, please see Meriwest Mortgage’s website  or contact them at 1-800-364-6636. Today’s rates are available here.

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For all of you out there looking for our next financial education workshops, your summer wait is over. Our next workshop will be "Reality Based Budgets for Teens" at our Milpitas Financial Center at 6PM on Aug. 22nd. 

Our next "Credit Myths and Repair Workshop" will take place at our Milpitas Financial Center on Aug. 29th at 6PM. 

I hope I will meet you at one of our seminars! Have a great week!