From the December 2002 issue of Startups

If you've managed to survive the last two years in a downtrodden economy, chances are you might not have gotten off scot-free. You might have added a few wrinkles to your credit history by making late payments to credit cards or vendors. So how do you go about fixing your credit score when it comes time to seek financing, get a loan or even open new accounts with vendors?

Most homebased business owners' credit is tied to their personal credit, says Mari Gottdiener, a credit report specialist, credit counselor and founder of Outsource Solutions, a credit counseling business. Your first step should be to get a copy of your credit report and see what your current score is. Credit scores are used to predict the risk that a consumer will default on a loan, and are calculated on a scale of 300 to 900, with anything over 620 considered acceptable. Most scores fall within the 500- to 800-point range, according to Gottdiener. "Credit scoring itself takes into account two things; the first is a consumer's past history in terms of account payment history, amount of accounts open and timeliness of payments. The second is a current snapshot of financial obligations," she says.

The first step to raising your score if you're seeking financing is to pay down revolving debt to less than 50 percent of your credit limit. This raises your score more than paying off individual cards one at a time, says Gottdiener. So if your credit limit on one card is $4,000, and you owe $3,000, pay it down to less than $2,000.

Don't open any new credit card accounts, loans or make any major purchases within a year of when you hope to apply for a loan. LowerMyBills.com, which provides price comparison services to consumers, was able to survive an 18-month bad credit spell when the dotcom bubble burst, by not avoiding creditors. "We were very proactive in communicating with vendors. We were very honest with people, saying, 'Hey, we can't make payments on this, but we do intend to make payments," says CEO and founder Matt Coffin. "We changed our own collection policies so we weren't giving such generous terms to other companies." Coffin was able to raise his company's score over a period of 12 months. If you take steps to improve your score, you'll see results immediately. "Your scores are going to go up every day, every month," says Gottdiener.

So how can you raise your score if it has major blemishes, like bankruptcy, collections, judgments against you or even a tax lien? It's important to know that tax liens stay on your credit report until seven years after they're paid off, bankruptcies stay on for 10 years, whether they're paid or not, while chargeoffs, delinquencies and judgments (when vendors sue you in small claims court for the amount you owe) stay on seven years from the time the accounts first went delinquent, paid off or not. Once an account goes to an outside collection agency, the damage has been done, and all that's left to do is wait out the seven years until it gets dropped from your credit report. Focus instead on the past 12 months, suggests Gottdiener, and demonstrate exemplary consumer behavior by ensuring that you're current on all your monthly payments. Eventually, your credit will get better.

NEXT STEP
It's better to check your score through the three major credit bureaus, rather than through any other online service, which can have difficult formats to read. You can check out your credit score at www.equifax.com, which offers its reports for $9, or a 3-in-1 report (with information from all three credit bureaus) for $29.95. Experian offers their credit report and scores for $14.95 (www.experian.com), while TransUnion's reports are free in some states, and vary in price in those states where they are for sale (www.transunion.com). For more information on how your credit score is calculated, as well as a list of top 10 factors that negatively affect your credit score, go to www.myfico.com