Here’s How You can Leverage your Credit

Being a small business owner might seem interesting and advantageous to many. However, it also has many disadvantages as compared to normal consumers. Before starting your own small business, you should be made aware of these things.  

Contents
1. Important Concepts
2. Rights and Protections
2.1. Credit Reports
2.2. Credit Scores
2.3. Protections for Credit Card Users 
2.4. Rejections in Credit or Loan 
2.5. Protection against Debit Card Fraud 
2.6. Interest and Annual Percentage Rates 

Important Concepts 

First of all, you should take note of these things for better understanding of your rights and protections. 

  • Credit Report – this is a breakdown of a person’s credit history made by a credit bureau. A credit bureau gathers information about people such as: personal financial details and their habit in paying their bills. Those data will then be used in creating a credit report. This report and other factors will then be used by lenders to analyze a borrower’s creditworthiness.  
  • Credit Score – This is a number that shows a consumer or a business’ creditworthiness. It typically lies between 300 to 850. The higher the score, the greater the chance for a borrower to be lent money. It is based on credit history, which consists of different factors such as: repayment history, total levels of debt, and number of open accounts. Lenders make use of the credit score to analyze the chance that a borrower will be able to pay in a timely manner. 
  • Federal Fair Credit Reporting Act (FCRA) – this law was passed in 1970 to regulate the gathering of consumer’s credit information. It also discusses their right to access their credit reports. It also addresses the privacy, accuracy, and fairness of the personal information found in the files of credit reporting agencies. 
  • Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act)– this federal law was created in order to protect credit card users from being abused by card issuers. It aims to reduce unexpected fees and improve the disclosure of penalties and costs. 
  • Equal Credit Opportunity Act (ECOA) – law that is created in order to provide all people with a chance to acquire loans and different types of credit from money lenders.  
  • Electronic Funds Transfer Act (EFTA) – this federal law that was passed in 1978 was created to protect consumers whenever they electronically transfer their funds. This include ATMS, debit cards, and automatic bank account withdrawals. This law also gives a way to correct errors in transactions, and decreases the liability from stolen or lost cards. 
  • Truth in Lending Act (TILA) – this federal law that was enacted in 1968 is used to protect consumers against unfair and inaccurate credit billing and practices. Consumers are entitled with information about loan cost in order to compare different types of loans. 

Rights and Protections

Take a look at the rights and protections that consumers have, but are deprived from small-business owners. 

Credit Reports 

  • Consumers – According to FCRA, consumers have the right to acquire a copy of their consumer report for free. It can be requested every 12 months from credit agencies, which are:  Experian, Equifax, and Transunion, and other specialty reporting agencies. In situations of adverse action, such as being turned down for loan or additional charges for credit, a consumer can ask for a free credit report. Other situations that provide free credit report includes: when a consumer is seeking employment, and if the consumer believes that the report has been fraudulent and inaccurate.  
  • Small Business Owners – So far, there is no such law that gives small business owners the same right as consumers. However, they can still acquire a free credit report.

Credit Scores 

  • Consumers – Just like in credit reports, in cases where credit scores affected situations of adverse action, such as being turned down for loan or additional charges for credit, a consumer can ask for their credit score.  The information that will be given also includes the credit score range and the 4 major factors that has a huge effect on the credit score. 
  • Small Business Owners – Small business owners mostly acquire their credit scores after paying a certain fee. Examples of few websites that provide free credit scores are: MyCreditsafe and Nav.

Protections for Credit Card Users 

  • Consumers – the CARD Act gives consumers numerous credit card protections which include reducing late or penalty fees, as well as giving about 45 days’ notice for changes in account terms, which includes interest rates.  
  • Small Business Owners – the CARD Act does not provide credit card protections for business owners. This can cause card issuers to change account terms or interest rates whenever they like, or add extra payments on whatever they desire. However, some card issuers can provide protections voluntarily. Their terms should be carefully considered before creating an account. In order to avoid late fees and rate increase, it is wise to set-up automatic payments.  

Rejections in Credit or Loan 

  • Consumers – If a consumer has been rejected from credit or loan, asked to pay more for credit or loan, or if a creditor closed his or her account, the consumer has the right to ask for credit-related details in written form about his or her case.  

The two laws that protect the rights of consumers, FCRA and ECOA require the  following: 

  1. Statement of the adverse action made by the creditor  
  1. Explanation for the action made by the creditor, or information on how to acquire the reasons for that specific action.  
  1. Information on how to obtain a free credit report that was used for the action 
  • Small Business Owners – the FCRA is not applicable for business credit, but ECOA helps small business owners. If the annual revenue of your business is $1 million or less, you may request for the reasons why you were rejected, which includes the first time that you applied for credit. This may be provided to you verbally or in written form.  

It is wise to carefully read and analyze the credit card application. If your application was  rejected, you should ask the lender for an explanation – by following the procedure given  from the start. 

Protection against Debit Card Fraud 

  • Consumers – If ever your card was lost or stolen and used by someone else, EFTA decreases your liability to about $50 in fraudulent charges, as long as you inform the bank within 60 days of the use. When reported, the bank or the financial institution will investigate about the fraudulent use in about 10 business days or your account will be credited. 
  • Small Business Owners – EFTA does not cover the misuse of business debit cards, and owners only have 24 hours to report about it. Some card issuers provide zero-liability for fraudulent use of business debit cards. However, there are varying processes of freezing, investigating, and crediting the account depending on the card issuer.  

It is important to daily check your banking accounts and set-up transaction alerts.  

Interest and Annual Percentage Rates 

  • Consumers – TILA obligates lenders to discuss the Annual Percentage Rate (APR) to inform consumers about the annual cost of the debit or credit. This is applied in credit card solicitations and applications. 
  • Small Business Owners – Lenders are not required to disclose their APR to small business loans. Lenders may instead confuse small business owners by describing the cost of debit or credit in multiple ways. Therefore, it is crucial that you fully understand how much it will cost you for the business financing that you are considering. It will be good not to assume that “rate” is the same as an APR. 
Rights and Protection Consumer Small Business Owner 
Credit Report Free Not covered by law 
Credit Score Free Mostly has a fee 
Protections for Credit Card Users  Many protections such as reducing late or penalty fees, and notice for change in terms Not protected by the law. Credit card issuers may change account terms or interest rates whenever they like, or add extra payments. 
Rejections in Credit or Loan   Covered by FCRA and ECOA Only helped by ECOA 
Protection against Debit Card Fraud   EFTA might decrease liability and conduct proper investigation about misuse of cards Misuse of business debit cards is not covered by EFTA 
Interest and Annual Percentage Rates   Entitled for disclosure of APR Not entitled for disclosure of APR 
Table 1. Summary

In summary, small business owners have lesser protections as compared to consumers. This was noticed by Senators Marco Rubio and John Kennedy. Therefore, in November 2018, they proposed the Small Business Credit Protection Act which aims to protect small businesses from data breaches. With this act: 

  • Credit bureaus are required to inform small business owners if their private personal data has been breached. This should be done within 30 days.  
  • Small business owners are also entitled to a free credit report within 180 days after a data breach. 

If this act will be fully implemented, it will help increase protection for small business owners. Just like consumers, they should be given more support by the government. However, since it is not yet in place, it is better to protect yourself by carefully reading loan and cardholder agreements, as well as checking your credit score and credit history. You should conduct thorough research to find the best credit card issuers and lenders. 

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