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-What's up, guys? Daniel McKenna, here. Today, Clay Clark is going to be sitting down with David Nilssen talking about the seven most common areas where people make mistakes when managing their credit before or after they start a business.
If you don't know David Nilssen is, David Nilssen is the co-founder and CEO of Guidant Financial. Guidant Financial has helped to connect small business owners to over $4 billion of capital that has been used to create over 60,000 jobs throughout the United States. In short, kind of a big deal.
David is going to teach you about where people make mistakes when managing their credit before or after they start a business, and specifically, what you can do to grow your credit. So make sure you pay attention in this series, and let's give some credit to David Nilssen for knowing so much about credit. Credit. This is me giving you credit, David. All right, to the lesson. Let's go.
David, I appreciate you letting me come harass you in your castle, here in Seattle.
DAVID MCKENNA: Yeah, thanks for coming.
CLAY CLARK: Hey. I want to ask you this before we get going, because I think a lot of people-- we're talking about the seven most common areas where people make mistakes when manage their credit. How important is your credit score? Just as, like, a broad brush, is this, like, eh, or is it super important?
DAVID MCKENNA: Well, as an entrepreneur, it's extremely important, because we rely on capital to acquire and then build our businesses. And access to capital is highly dependent on your credit score. So I think it's imperative that people manage those well.
CLAY CLARK: Well, I'm going to read the definitions from our good friends at Investopedia about a credit score. It says, it's "a statistically derived numeric expression of a person's creditworthiness that is used by lenders to assess the likelihood that a person will repay his or her debts. A credit scores based on, among other things, a person's past credit history." So it's a number where, what, it goes up to 850?
DAVID MCKENNA: Yeah.
CLAY CLARK: I mean, is that the highest number you can get? I mean, are you on fire if you're at an 850?
DAVID MCKENNA: You are, yeah. I mean, typically the range can go from about 350 on the low side to 850 on the high side. If somebody has a credit score, a FICO score, above, say, 720, then you've got excellent credit.
CLAY CLARK: OK. Now, what I want to do is, I want to break down some of these terms. Because I know a lot of people-- I talked to one business owner the other day-- and they're looking to expand into their second location. Business is good, and they're expanding to the second.
They go and they talk to-- the first place they leased, they leased from a friend. The second place, though, they said, well, I want to see your credit. And they mentioned this thing called the FICO score.
Now, I know the FICO score is the most widely-used credit scoring system. The definition is, it's "an acronym for the Fair Isaac Corporation, the company that provides the credit score model to financial institutions." But really, what is the FICO score? What does it mean?
DAVID MCKENNA: Well, when you talk about a credit score, that really is the FICO score. I don't know this number to be exact, but it's somewhere like 90% to 95% of financial institutions use the Fair Isaac Corporation scoring model, which is what FIFO is.
So there are many different bureaus out there, there's three, specifically, that are the most widely used. But at the end of the day, the FICO is the credit score. And it really is a representation of, how well do I manage my finances.
CLAY CLARK: So if you're an entrepreneur watching this and someone asks for your FICO score, don't get scared. I think she was, like, what's a FICO? FICO?
DAVID MCKENNA: Yeah, they're just basically talking about credit.
CLAY CLARK: OK. Now, there's three major credit bureaus, was my understanding, that basically help determine your score or help keep track of your score, there. We have Equifax, Experian, and TransUnion. Are there any other credit bureaus that I need to be aware of?
DAVID MCKENNA: Those are the three major ones.
CLAY CLARK: How do these guys get our credit information? Are they sifting through our mail or tapping our phones? What do they do?
DAVID MCKENNA: Yeah. So we're electing, as part of-- when we get a credit card, when we get a mortgage-- we're authorizing that information to be reported to the credit bureaus. And so, we're electing into that process.
CLAY CLARK: I'm going to ask you some different areas that there's a lot of myth about. Well, this does affect your credit or this doesn't. So I just want to, off the top of my head, ask you a few, here.
DAVID MCKENNA: Yeah.
CLAY CLARK: If you don't put your phone bill, you say, ah, phone bill, shmoan bill. I'm not paying my phone bill. Does that affect your credit?
DAVID MCKENNA: You know, I don't believe so. Well, now, I should say, if you get sent to collections, that can always affect your credit, but I don't believe that it would.
CLAY CLARK: The reason why I mention that is because I see a lot of entrepreneurs who are in collections. And then, they're like, I don't understand why my credit score is low. I don't get.
I did commercial real estate consulting for years. And so, you really don't want ever to go to collections, right?
DAVID MCKENNA: No, you don't. But you've also seen people that, when you go to the doctor, right, and you make that visit and forget to pay, and then you get people that are sent to medical collections. Those medical collections will go towards your credit.
CLAY CLARK: So, David, I want to ask you this, here now. We're going to get into these seven areas where people make mistakes common. This first one is consolidating balances. Where do most people make mistakes here when it comes to consolidating balances with their credit? Where do people go wrong, here?
DAVID MCKENNA: Well, I should probably note that I'm not a quote unquote, "credit expert," right. These are things that we've seen that affect people's ability to access credit. So when you think about consolidating balances, we all get-- if you've got a credit card-- you get mail all the time.
And it says, hey, if you consolidate your balances, put these all onto one credit card, we'll do it at a very low interest rate for the life of the balance transfer or maybe a 0% for the first two years. We get these all the time. And from the fiscal perspective, that makes a lot of sense, right.
So I've got $5,000 here that I'm paying 13% on, I've got $5,000 here that I'm paying 18% on. But if I combine them onto another credit card, I can put $10,000 onto this one credit card, and I've got a 0% interest rate for the next 24 months, right. All of a sudden, that makes tons of sense.
The challenge is, when you look at lending, some of the lenders will want to see that your credit utilization rate is under 40% on every line. So what that means is that if I have a $10,000 credit line, that they don't want to see any more than $3,999 charged to that credit line. Otherwise, my credit utilization rate has gone up to or above 40%.
CLAY CLARK: Boom! OK.
DAVID MCKENNA: So what happens is, if I've got $5,000 here and $5,000 here, and in those separate credit lines, it's under 40%, that's OK, it's not having an impact. But the moment I consolidate those, if it pushes that credit utilization rate on that line above 40%, it could impact my ability to get financing.
CLAY CLARK: Really?
DAVID MCKENNA: Mhm.
-OK, so you want to keep your credit utilization rate roughly around the 40%. We know you're not a credit expert. But we want to keep it down--
---below that 40% line. OK. Now, what is-- as it relates to consolidating balances, what are things that people do all the time that you say, stop doing that. Is basically just putting it all on one card? Is that thing you just have to stop doing that.
-I mean, again, it makes sense fiscally. So, after you've obtained financing that wouldn't be a big deal, right? And it's not something that can't be solved anyways. If somebody comes to us and has that issue today, you can always balance transfer away. Right? So, the same company that you balanced transferred from, you can balance transfer back to. But in general, like I said, when you're going to financing, you want to make sure that every single one of your revolving credit lines is under a 40% rate.
-How much does that impact your score? Let's say everything else is perfect. You've got everything together. You are a credit guru. But you're 90% on one card, two cards. How much does that mess with the force?
-The credit algorithm is kind of like Google's algorithm.
-It's one of those that we're not-- there's no hard, fast rule that anyone can specifically site. What I do know is that once you go-- the higher you go as far as utilization rate, the more that will impact your score.
-OK. We're moving on to the second most common problem area, this mistake area-- is using personal credit cards versus business cards. Let's talk about that. So, for most business owners watching this, they probably-- if you're a small business owner-- let's say you own a bakery. Every month you're paying $4-5,000, let's say, for online advertisements, or to ship your goods. Whatever you're doing, every month you're putting it on a credit card so you can manage it all. Where do we get it wrong?
-So, this is where I see a lot of entrepreneurs who will call-- I'm in an American Express fan, right?
-A lot of, most of my credit is in American Express. So, when we first started our company, I called American Express and said, hey, we started this business. I'd like to get corporate credit card. So, they went ahead and issued me a credit card. They overnighted it to me. I had it within a day and a half. And this credit card says, David Nilssen. Guiding Financial. And what's interesting is, yes, I had to personally guarantee that debt. So, I'm still saying that financially I'm on the hook for this. But it doesn't show up on my personal credit account unless I default. So, when we talked about consolidating balances and having more than a 40% credit utilization rate, that's because that has an impact on my personal score, and it signifies challenges or increased risk to a potential lender. But if I have a business credit card, and it's not showing up on my individual FICA report, I could charge up 100% of that, and it's not technically having an impact.
-OK, so let's say that I'm a bakery, I'm watching this. I'm going, this is some knowledge I did not get in college. This is-- I'm doing this. I'm going to get this Amex card. Can anybody get a business card with a big limit on it? Or do yoe-- Because I hear stories of people who say, I applied for my business card, and I was given $1,000. So, I have to use my personal for right now until-- tell me about that.
-Yeah, so the credit cards, the limits are going to be issued based on someone's perceived risk, so their credit score. So, if you've managed your credit very well in the past, you'll potentially get a much higher limit. Some of the institutions are more liberal than others. So, I've heard, although I can't confirm, that Discover is more liberal than American Express. But American Express is amazingly friendly when it comes to fraud and service and so on and so forth. So, you just have to decide what's most important to you. But at the end of the day, they're going to look at your income. They're going to look at what your potential income will be for the business that year, and then your credit score, and they'll make a determination based on that.
-Now, obviously, this is not an advertorial for American Express, but you said that you liked American Express. What you like about these guys? What do you like about it?
-I personally like a couple things. First, is I think they have a very friendly point system. So, I'm charging a lot of things on my credit card all the time, right? So, I want to make sure that I'm getting some benefits out of that. The second thing is that when I have a service need, they are amazingly prompt, extremely friendly. There have been times where my credit card has been compromised, and they're amazingly effective at understanding which of your transactions don't meet the normal patterns for yourself. And then they'll also take those charges, any false charges, off your bill until they can either confirm they're yours or confirm they're not.
-Talk to me about this real quick. This is a little bit off road, but I want to ask you this.
-In the last month, I have talked to two business owners who have been putting everything on their debit card. Hear me on this. And they had over ba-- they got charged, so they actually went over-- they basically bounced a charge or they we got to a point where they ran out of funds. And they said, well, I didn't know the vendor was going to charge me $3,000 or $6,000 or whatever. Would you recommend as just a best practice, never put any recurring billings, that kind of thing, on your debit card? Would you recommend putting on these corporate cards, like an Amex, so you could challenge them and that kind of thing?
-So I'm a fan of using corporate credit, for sure. I'm also a fan with vendors who are going to be billing us on a very normal cycle. I like for them to invoice us so we can just cut them a check. But we can always pay with a credit card. I think credit is a great way to manage cash flow too. Because as you know, in small businesses, cash flow can ebb and flow. So, using a debit card just means that you feel very secure in the potential cash flow going forward.
-Now the third most common mistake area is cancelling credit lines. Where you say, well, you know, I'm not going to use this. I can go back to the bakery example. You say, you know, things are good. I've got my one awesome Amex card. Life is good. And we say, I'm done with this Master Card. That was the old days. I'm done. I'm going to my Amex black card. Why is it bad to cancel a card? Or is it bad?
-Yeah, so, in general, it's not necessarily bad. I mean, it's not like there's anything wrong with canceling a credit line. The challenge is that in today's environment, the difference between being approved and not being approved could be one point on your FICO score.
CLAY CLARK: What?
-OK, so, if knowing that, you don't want to do things that could adversely affect your credit score. Well, credit score is coming from a look at the way that you've managed your credit historically. So, the longer you have a credit line, a trade line on your credit score, that has been effectively managed over a period time, the more history, the more value it's providing to your credit score.
So, I made this mistake when I was younger. I had had a Discover card to start. Never used it, but it had been sitting there for a while. And I cancelled that because I wasn't using it. And it was at the same time that I was trying to buy a home. And it did-- it wasn't dramatic, but it did have an impact on my credit score. So, it was funny because by the time I started the purchase process, by the time that we actually went to fund, my credit score had changed.
And the only thing that we could see in that had changed at all was that I had cancelled that credit line. So, I think it's important that when you're going through a financial event-- like financing a business, buying up a piece of property-- be very careful about any kind of macro changes that you make to your financial landscape.
-I've heard if you have too many open credit lines that could be a bad deal. Is there any truth to that, from what you've seen? I mean I know you're not a lending expert, or credit expert I guess, but do you feel like there's any value to that? Or is that sort of just hoohah?
-I've heard the same thing. So, I personally have eliminated all department store credit. So, like, when you're younger you go to The Gap or the Macy's or Nordstroms or whatever and you open up these department store credit cards, but then you don't ever use them?
CLAY CLARK: Yeah.
-Yeah, I did eventually eliminate those from my own credit profile. But the major credit card, major trade lines? I don't know. I would be surprised to say that those are having an adverse impact.
-Now, let's talk about this fourth common area-- this is common area of mistakes that people make-- is seeking restoration or disputing claims. So, let's say your credit is jacked. I mean, you've done some weird stuff. Let's just say you went out and you said I'm going to buy a car. I'm not going to pay for the car. And then you get the car taken back. Or you did-- we all make a mistake at one point in our life in some area, but let's say that yours was just not paying stuff. Should you seek restoration? Should you not? Should you dispute claims? Should you not? Tell us about this.
-Well, so the reason I put that in there is-- so, there are times where people have just deliberately poorly managed their credit or finances. I'm not speaking to those people. That is a bed you made, you gotta lie in it. OK, so the people that I'm really referring to when I say, hey, seeking restoration is-- I happen to know an individual who was sent to collections for a medical bill that was under $100. OK? But they never, to their knowledge, received any notices on it. Didn't know they owed it. All of a sudden, they just started getting calls from a collection agency.
And I've heard this many times, so this is not an uncommon situation. So, in that particular situation, when you're negotiating with a collections agency, when you go to settle with them, you can certainly ask for restoration. Now, it doesn't always happen, but if it does-- I mean, ask for it. Because if it does happen, it can seriously impact your credit in a positive way.
-Now, let me ask you this here. If I have a credit that's not awesome. Let's just say that you're-- say a guy's 50. And when he was 40, he went into foreclosure. He went into bankruptcy when he was 40 years. Some major event, like a foreclosure or bankruptcy. My mind, those are the kind of extremes. How long does it take-- now that he's 50. So it's been a full 10 years. How long does it take-- if he's been doing everything else right, how long does it take till someone like that can secure financing again, or ever?
-Well, it kind of depends. I mean, I've seen people who have filed a bankruptcy and two or three years later their credit has rebounded to a place that technically could be financeable. Now, the banks are going to underwrite a transaction based on their perceived risk. Their credit score is a piece of that. Their credit history is a piece of that. And their financial wherewithal is another piece of that. So, all three of those things have to align in one way, shape, or form. So, from a scoring standpoint, it can rebound relatively quickly.
CLAY CLARK: OK.
-Still, from a financeability standpoint, it can take more.
-Having helped 10,000 people get financing and help them find funding solutions over the course of the years here-- I mean, you've done this so much. Do you think it's about a 10 year window or a 20 year window before somebody can start to go, hey, I could-- you know, if a guy wanted to borrow money to open up a vodka distillery, and he had some mistakes he made in his 20s. In his 40s he should be good to go at that point? Or is it 10 years later usually? Or what would--
-It definitely depends on the type of event and the circumstances around it. So, sometimes when we have somebody who has an imperfect credit history but a great credit score, then it's something that we support with a letter of explanation around it. Because the banks are going to make the decision themselves.
CLAY CLARK: Yeah.
-So, there's no science behind it. It's a little bit of an art. That being said, yeah, I would say that any major catastrophic financial event that occurred, typically, is going to have less impact five years later. Significantly less after 10.
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