The fate of consumers and small business owner’s finances is wrapped in their ability to access credit and capital. This is increasingly the case, but still few borrowers are aware of exactly how their credit scores are determined. To further complicate what may already be a confusing picture for many, there is a new competitor on the market that, if it is successful in the market, will give consumers a second credit score in addition to the one they already have.

The current credit industry is something like a pyramid in its structure. At the bottom are the consumers who want to finance a car or new refrigerator. These individuals seek a line of credit through a credit lender, or the bank that will be providing the financing. This bank pays one of three credit bureaus for your FICO^{® *} credit score. The credit bureau, either Equifax, Experian, or TransUnion, depending on who your lender uses, then pays a company called Fair Isaac.

A consumer’s credit score is a calculation of the risk a lender will be taking in loaning the individual money. Equifax, TransUnion, and Experian all track individual’s fiscal habits: their debts, payment habits, etc. Their compiled information must be placed into a formula, the FICO^{® *} formula that Fair Isaac owns, in order to pop out a number that is the consumer’s credit score. The FICO^{® *} model is very widely used. It is the formula vastly preferred by lenders, who find it predictable and reliable. This is understandable; Fair Isaac has been involved in the credit industry for nearly half a century, and 80% of major lenders use their system to calculate credit scores.

The credit bureaus would benefit greatly from not being required to pay the top of the totem pole (FICO^{® *}) every time they run a credit report. To that end, they have developed and promoted their own credit scoring system, dubbed VantageScore. There are a few differences evident already between the two systems. Most notable to consumers, the VantageScore model employs a different numerical scale than the FICO^{® *} system. FICO^{® *} runs from 300 to 850^® *. The VantageScore model runs from 501-990, and is set up in a grade school fashion. 501-600 is an F or failing rating; 601-700 is a D or poor rating; 701-800 is a C or fair rating, etc. While this may seem like a benefit due to its more logical numbering, consumers will now be assigned two different credit scores depending on which system is being used.

Credit bureaus have long complained of Fair Isaac’s treatment of those with short credit histories, or who have few accounts. The big three bureaus feel that the FICO^{® *} model falsely inflates the credit scores of these individuals, meaning that the FICO^{® *} scoring underestimates the risk that they may pose to lenders. In launching their new VantageScore system, they claim to have more fairly gauged the risk of these individuals. This could likely mean making credit less attainable for these consumers. If this is the case, more young Americans and those who haven’t actively beefed up their credit portfolios will hurt from the new system.

The exact differences, benefits, and downsides of the VantageScore system versus the FICO^{® *} system remain to be seen, but consumers should be watchful of how the credit landscape changes for them based on this new arrival.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.

Small businesses are extremely important to our culture and our economy. In fact, small businesses make up a very significant portion of our economy. They thrive on local business and give life to the monetary heartbeat of America. The financial success of America’s small businesses lies heavily on their ability to attain credit in order to maintain their business.

Recently, FICO^{® *} has changed some of its rules for the credit approval systems for these businesses. It is important for business owners to understand these changes to the credit score formula. These types of changes may affect some of the decisions business owners make for the success of their business and it is important to pay close attention to these changes.

FICO^{® *} has announced that authorized users on credit accounts will not have that credit account factored into their credit scores. In other words, credit determine by a credit account for the primary user on the account. This means several things for a small business owner as a credit holder.

Loss of credit: Small business owners should be aware that their credit scores might likely drop because of this change. They are essentially losing credit because they will no longer get credit improvement for being an authorized user on a successfully managed credit account. Business owners should look into their credit to see how many accounts they are on where they are listed as authorized rather than primary. Be mindful that the more authorized accounts you are on, the lower your credit may drop.

Fraud: If you actually had to pay to have your name added as an authorized user on a credit account, you should be aware that you might actually be guilty of fraud. Business owners should be aware of this and have their names immediately removed from any accounts that they paid to have their names added to. The last thing a small business owner needs is a fraud lawsuit coming up on their record. It is best to stay away from these types of accounts all together.

Stop adding yourself to new accounts: Especially newlyweds or business partners. If you are considering having a joint credit account, do not. This decision could only put your small business in jeopardy. Consider opening two separate credit accounts with your name only as a primary user. This is the only way to ensure you maintain a good credit score.

Open a credit account: If you do not have any credit accounts that list you as the primary user, it may be a good idea to open one or two credit accounts of your own. Make sure they are accounts that you can afford to maintain and pay off. This is a great way to improve your credit score. Especially consider opening an account if you are a woman. Women tend to be authorized users more often than men. This means that women will be more impacted by these changes and should consider their own accounts.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.

The success or failure of a small business could very well rest on the business owners’ credit scores, especially with the failure of most businesses in the first six months of the business. It is important that business owners are aware of FICO^{® *}’s many laws and formulas used to establish credit for their customers. This will help business owners make informed decisions about how they manage and deal with their business in order to maximize their chances for a good credit. A good credit score can make or break the success of your business. Here is a guide to how FICO^{® *} reviews your business and determines your credit score.

Payment history: The history of how well a company pays off its debts is one important thing that FICO^® looks at when determining a company’s credit. In fact, about 35% of a company’s credit score is determine by this. Payment history analyzes how often debts are incurred, how quickly they are paid back, and whether or not payments are made on time. Of course having some debt is ok for your credit report, as long as you are making timely payments and are responsible about incurring debts.

Amount owed: Another important thing that FICO^® looks at are the actual amount your company owes in debt. This is important because a company with very major debts are less likely to pay them back and have good credit that a company with appropriate good debts. Make sure that you and your business do not have excessive debts that may look suspicious or caution FICO^®. This can account for up to 30% of your credit score.

Length of credit: The amount of time debts are outstanding is important to establishing a credit score as well. This is because the longer a debt remains outstanding, or the longer a credit, the less likely it is to be good for your credit score. In fact, the longer you go without paying off a debt the worse it is on your credit. However, a long history of good debt occurrences and reasonable pay-back time frames is a great way to establish good credit. This number actually accounts for around 15% of your credit score.

New credit: The type of credit you have can also greatly affect your credit score. New credit can sometimes be a cause for concern, however as long as it is not terribly excessive or unexplainable. It is also important to maintain a strong debt to equity ratio to demonstrate to credit reporters that you are not in financial trouble. This accounts for around 10% of your credit score.

Type of credit: The type of credit a business has is also very important. For example, if you have a line of credit with your bank, a line of credit with a major office supplier, and a seldom-used credit card account for overdraft protection are good types of credit. However, if you use a line of credit for overdraft protection and it has large outstanding sums on it, this is not a responsible type of credit. Type of credit usually comes out to account for around 10% of your credit score.

No matter what your credit score, it is important for you and your small business that you understand what goes into it.

* FICO, myFICO, and 300-850 score are trademarks and/or registered trademarks of Fair Isaac Corporation.