Being a successful entrepreneur can mean enduring insults from competitors and even lies from jealous peers. Once you climb to the top of your industry, though, this doesn’t bother you. When you’ve established a good reputation, those people can’t really hurt you.
However, when you’re just starting out, you’re like a lion cub: One day, you’ll rule the jungle, but until you reach a certain size you’re vulnerable. This is my long way of explaining why an under-reported FICO study is crucial for new entrepreneurs. Fair Isaac Corp. (better known as FICO) is the lion of credit scores. It’s the largest of several companies whose number-crunching algorithms determine whether you’ll get a loan and at what interest rate.
FICO recently studied some changes coming to the way credit scores are calculated. Some background: Starting in July, your credit score will no longer be dinged by all civil judgments and tax liens. Why? Because the Big Three credit bureaus – Equifax, Experian and TransUnion – have agreed these public records aren’t reliable. In fact, they’re wrong often enough that they can unfairly drag down a credit score.
FICO crunched the numbers and made some predictions about these changes, According to NBC News – one of the few mainstream media outlets to really cover this story – “out of the 200 million Americans with credit scores, 12 million consumers will see them increase in July.”
NBC News added, “However, it may not be by much. FICO projects 11 million consumers will see a score increase of less than 20 points.” Then again, a real estate publication called The Real Deal offered the best news stating: “Hundreds of thousands of the increases will be super-sized -- in the 40 to 60 points and higher range.”
What’s missing from that reporting is the out-sized impact these changes can have on new, and even veteran, entrepreneurs. While a hike of 20 points won’t make the difference between success and failure, the cumulative and psychological effects may be notable. For instance, some young entrepreneurs are hard-working and know their industry, but they’re not yet a good judge of character. Stories abound of ethical entrepreneurs who hook up with unethical partners. The result can be a civil judgment that sticks with the ethical partner and drags down a credit score that will be needed later for a new loan.
The same thing happens with tax liens. More than few entrepreneurs have made serious mistakes that got them in trouble with the IRS. That doesn’t necessarily make them bad people or even bad business leaders, as long as they own up and learn from their mistakes. Now those mistakes won’t follow them for years.
How important is a credit score? As Entrepreneur has reported before, a good credit score can save you more than $100,000. Of course, established entrepreneurs have a business credit score, which Entrepreneur has given solid advice for boosting. These changes will help both personal and business scorers, but it’s true that many brand-new entrepreneurs use their personal credit to launch their enterprises.
Then there’s simply the psychological aspect of these changes. We often focus on the numbers, as well we should, but the reality is, bad news takes its toll when you pour your life into your new business. Just knowing most civil judgments and tax liens aren’t hurting your credit score is enough to put a smile on your face, regardless of its impact.