I say “finally” because to many people, the credit score is the be-all, end-all of borrowing. And it is true that credit scores and related risk factors are important, but not always in the way people think.   

I look at credit scores and related two ways: in one way, they can be a gatekeeper. Lower than, say, 650-700, and many higher-quality lenders are going to turn potential borrowers away without considering anything else. This is why many people consider them super important (and they are).

But in terms of affecting the rate, we have to already assume a borrower has met this minimum threshold. So from that point, all of the other factors I’ve already discussed have approximately equal or even greater impact on the rate.

Here’s why: while your credit score is impactful, not all credit scores are created equal. Two different credit reports each with a 700 score could have very different paths to get there. Maybe one has a thick file with 20 years’ worth of history and the other has a thin three. The 20 years speaks a lot louder. 

But it’s not just FICO scores. There are several other scoring systems like D&B’s PAYDEX, SBRi, Experian’s Intelliscore Plus, Equifax’s Payment Index, PayNet MasterScore v2, and even FICO SBSS for small businesses. Many lenders will also use public records (suits, liens, judgments) in not only making decisions, but helping to determine a rate. 

Any or all of the preceding reports and scores are utilized by most commercial lenders on most loans. For Crest Capital, we utilize many of these in our application-only loan process (deals $150k and under).  

But besides scores, what else could affect your rate? There are a few other overall factors that most lenders will look at with almost any type of loan:

• Industry Risk – Certain industries are riskier than others. For example, the restaurant industry is extremely volatile, with new openings experiencing an 80% five-year failure rate. However, over that same five-year period, the self-storage industry has a low 8% failure rate. So, all else being equal, who would you rather write a five-year loan for? And who should get a lower rate? No brainer, right? All industries have a risk factor, with the more stable ones typically getting better rates. In fact, many lenders won’t even engage with riskier industries.

• Economic forecasts – There’s always a bit of a crystal ball with lending. How is the economic forecast? Nationally? Industry-wise? Locally? These are all going to matter.

Hopefully, this blog has given you a good insight into how credit scores and other factors can affect your rate. If you want to learn a little more about Crest’s process and what we look for, check out our Equipment Financing Credit Requirements page.

Anyway, the question was raised (how’s that?) regarding “shopping around” for a good rate on something like a mortgage and/or a car loan or something similar. And it’s definitely a valid question – after all, if I say credit inquiries are bad for your credit score, and you go to two or three mortgage companies to compare rates, are you hurting your credit score by doing so?

The short answer there is no, you will not. The credit industry recognizes this, and has put a few rules in place to make “shopping around” for certain types of loans ok. The big ones are homes and cars, although there are a few others (commercial mortgages and the like). But essentially, for these types of loans, all inquiries made within a two week period count as one inquiry. So if you are buying a home and are shopping for a mortgage, you can go to several (say three) lenders and have them quote you (which means all three will make a credit inquiry). As long as it’s in a two-week period, these three inquiries will count only as one – the credit industry will assume you are doing exactly what you are doing – shopping around for the best mortgage rate.

The same applies for an automobile loan. The industry knows that buying a car is a big deal for most folks, and getting a few points off your interest rate can make a big difference.

However, like everything else I write here, don’t assume everything I say is 100% gospel. I mean, if the credit companies change their rules, they don’t call me. But that said, yes, go ahead and shop around for the best rate if you are looking for a home or a car – it shouldn’t hurt you. But don’t apply for every credit card in town either – that will definitely hurt your score.

Well, I came to the conclusion that yes, it’s good that we have computers, even if they do crash from time to time. And for proof, we need look no further than equipment financing credit models used to assess credit risk.

What do I mean by this? To answer that, let me tell you about Mr. Roberts and myself.

Mr. Roberts was sort of my mentor in the equipment financing industry. He was that guy that every company had that has been around since the company started, he was (seemingly) 80 years old, and he knew EVERYTHING.

Mr. Roberts had this little notebook that he treasured. And in this little notebook was all manner of formulas and notes regarding past loans. Mr. Roberts used this notebook to make equipment financing decisions. At a glance (well, not really – his handwriting was atrocious), one could look at his notebook and deduce that Mr. Roberts was the greatest credit mind of his time. He had amounts, types of equipment, where the company was located, how old the company was, etc – and he concocted formulas that helped him judge just whether a company could get an equipment lease. Brilliant stuff.

This was… two companies and about a quarter century ago. And would you know that today, Mr. Roberts would be out of a job. Because his success rate regarding loans defaulted, while good for its time, would pale in comparison to what we can do today. In short, we don’t use notebooks and gut feeling anymore – we have FICO-created computer models that make my success rate quite a bit better than what old Mr. Roberts’ notebook could predict. Yes, we still tweak these models based on our own data, but equipment financing companies are stronger today using computer models to assess credit risk.

In a future post, we’ll take a look at some of the data these models use. But yes, to answer my original question, computers are definitely needed. However, I have yet to find a computer that could spin a yarn quite like Mr. Roberts. Here’s to you, old-timer!!

Ok, I’ll admit, my audience IS pretty finance savvy, but, as my wife reminds me, I’m no Rockefeller. I mean, my last post was about golf. Hardly highbrow stuff.

But anyway, this brings me to this post’s topic – a very basic credit score explanation. This is because I talk about credit, finance rates, equipment financing, Section 179 (again and again)…. But I always mention “good credit scores” as if everyone knows what number is actually “good”. And I realize a lot of people really don’t know that. So here’s a quick and dirty primer on the basics as to what a “good” credit score is:

First of all, your credit score is the score the four major credit reporting agencies give you. It’s a numerical score based on all of your credit activity. The four reporting agencies are: Experian (formerly TRW), Equifax, TransUnion, and Innovis. Yea, that last one isn’t as well known, but they’re part of the equation. They each give you a score that ranges from about 300 – 850. The higher the number, the better (to make it simple, you can say your single credit score is an average of the four).

Anyway, here is what the numbers generally mean:

760 – 850 = excellent

700 – 759 = great

660 – 699 = good

620 – 659 = fair

580 – 619 = poor

580 and below = ummm… bad.

These numbers are taken from my industry – in other words, it’s what we use (as an average). Here are the “official” numbers from FICO (Fair Issac Scoring)

760-850 = Great

725-759 = Very Good

660-724 = Good

560-659 = Not so Good

300-559 = Bad

As you can see, my industry is a bit more lenient overall. Someone with 700 is “great” in an equipment financing company’s eyes, but only “good” in FICO’s eyes. “Great” trumps “good”.

So why is this? Well, I think it’s because my industry usually puts a “face” to the score. Plus, we deal with businesses, where we understand that sometimes, things don’t always go as planned. So many different things affect credit scores that we are probably willing to overlook a little negative.

I hope this was helpful in showing you what the raw “credit score” number means in terms of where you stand. I’m going to talk about credit scores more in the months to come, and we’ll get into what affects credit scores, the credit reporting bureaus, and more. Stay tuned.