The Trucker’s Guide to Understanding Credit
Whether you’re looking to finance a new or used commercial truck or thinking about getting a loan for your business, the lending world can seem overwhelming. A lot of drivers want to get their business needs and want to be organized in a fast efficient way. The spider web that loans, financing, and credit create can be tough to sort through. In the worst situation, you could find yourself stuck in a bad spot with things like high-interest rates or big fat declines. Learn more with this guide to understanding credit
Truckers have enough going on. To make your life easier, we have made an easy to understand guide. This will get you familiar with the most common terms and concepts from the financing world you’ll need to know.
Credit is simply borrowed funds or money that you can use for personal or business purchases and needs. You receive credit from a grantor (and lender, or credit card issue) upon an agreement to pay back the amount you borrowed at an agreed time with applicable charges and fees.
There are four different types of credit that can be borrowed:
Revolving: this what you often see in your typical credit card. A bank or lender gives you a maximum credit limit that you make charges upon up until you reach that amount. On a monthly basis, you carry a balance and make payments on it.
Service Credit: Any agreements made with service providers are also considered to be credit arrangements. Whether you are receiving a service like electricity, internet, or water, you have an agreement to pay for every month either as a set fee or how much you used. While not all of these will report directly to your final score, some can.
Charge Cards: Similar to revolving credit, these accounts require you to pay the entire balance on a monthly basis instead of a monthly payment.
Installment Credit/Installment Loan: This is where loans and financing come in. A lender will give you a set amount of funds upon the agreement that you pay back the money and interest on a regular basis. These payments are called installments and are usually a fixed amount over a fixed period. An example of an installment loan would be like a mortgage or car payments.
So Why Do We Need Credit?
Some truckers say that “cash is king” or suggest you pay cash for everything because of distrust for banks and financial institutions. While walking around with liquid funds to get everything you want out of this world would be an ideal situation, for most truck drivers it is not a reality. This is where borrowing becomes a key factor in a lot of trucker’s lives.
Outside of the trucking world, big purchases like buying a home or car often will require loans for most Americans. Many people simply like the convenience and advantages that borrowing brings to their life. Additionally, your credit score can also be looked at by potential landlords if you are trying to rent from them. It is pretty hard to avoid in today’s world.
From a business owners’ perspective, credit is essential. Big purchases and borrowing are often necessary for growth. Large fleet owners will finance multiple pieces of equipment at a time, with large amounts of money that just wouldn’t be possible without taking out a loan or a line of credit.
Credit Reports and Credit Scores
Other than the direct action of borrowing, spending, and paying back the money, credit is used to determine financial risks. This is where your Credit Report and Credit Score come into play. To put it simply, your credit report is a detailed statement with information about your borrowing activity. This info is summarized in the form of a Credit Score.
Your Credit Score is a numerical rating you are given based on what is contained in your report. We will get to the nitty-gritty details of what is exactly in a credit report and how the scores are calculated a little later, but that is what you need to know for now.
When you are looking to get a credit card or loan, credit grantors will look at your report and score to see how reliable you are. If you are trying to borrow money, the lender will be looking to see if you are at risk of defaulting. To default means to not pay back the debt owed according to the arrangement you had made.
Good credit reports show that you have paid back your debts on time, and also have a good amount of experience in borrowing. This shows your banks and lenders that you will most likely pay back your debts with little problems. Bad credit will look like lots of defaults, late payments, mixed with little credit history. This makes credit grantors wary of lending to you.
Is No Credit a Bad Thing?
Having no credit is a bit more complicated than being a “good” or “bad” thing.
On the positive side, having no credit is nowhere near as bad as having a bad credit report you need to repair. This is why it is SO important for those just beginning their credit journey to tread carefully. Find responsible lenders and slowly build your credit history over time with credit cards and loans you know you can payback.
So, what’s the bad part of having no credit? Well, the lenders don’t have the concrete evidence of your borrowing history to judge your ability to pay them back. Instead, they have to determine your ability solely on other things like bank statements, how much you make, your other expenses, etc.
You might also be limited to what you can get approved for. Don’t fret, most big banks and lenders have specific credit cards, loans, and programs specifically tailored for people beginning to borrow. With these, people can steadily build their credit history and get their credit score higher.
Who is Keeping Track of This?
In the United States, your credit history and score are collected and maintained by credit reporting agencies (CRAs). These are also known as Credit Bureaus. The three major CRAs are Equifax, Experian, and TransUnion. These agencies are regulated by the U.S government under the Fair Credit Reporting Act (FCRA).
Everyone in the United States with a social security number can have a credit and report. If you have never borrowed money in your life, you shouldn’t have a credit report and your score would be considered 0.
Most grantors will look into your credit report before approving you for funds. They do this by requesting your credit report and score from one or all of the bureaus. This action is called an inquiry.
Such an inquiry can be done two ways: either by a hard inquiry or a soft inquiry.
A Hard Inquiry is an official request made by a lender to the bureaus so they can view your credit report in full. Hard inquiries themselves show up on your report and impact the score by lowering it a few points. Each individual inquiry stays on your credit for 2 years before going away forever. Often, one or two will not harm your score very much and is not a bad thing to have on your credit report. Hard Inquiries are usually required when you apply for financing, loans, or a mortgage.
A Soft Inquiry can be considered a non-official credit check. These do not impact your score and do not show up on your report. Often, a soft inquiry will show roughly the same information as a hard inquiry but isn’t included in most official lending applications. A soft inquiry can be used for things like background checks, pre-approvals, and checking your own score on free credit monitoring sites.
Ok, What About This Credit Score Thing?
Your credit score can be imagined as a grade you are given based on how well you’ve managed your loans and borrowed money. The credit score itself is important is it directly affects if you can borrow money and how much it will cost you to do so.
There are actually different types of credit scores and ways that they are calculated, but the most popular and commonly known type is the FICO Score.
FICO Credit Scores typically range from 300 to 850 with 300 being very poor and 850 being exceptional.
Here is the detailed breakdown of FICO Score Ranges
300-579: A score in this range is considered Very Poor. Credit applicants with a score in this range will often be required to pay larger fees and deposits, or sometimes may not be approved at all. 16% of people have a score in this range.
580-669: Scores between the 580 mark to the higher 600s are called Fair credit scores. Often, people with scores in this range will be referred to as subprime borrowers. A total of 17% of people have a credit score in this range.
670-739: This range is referred to as Good. Individuals with scores this high have a much lower rate of default. Statistically, about 8% of applicants with a Good range credit score will become seriously delinquent. Around 21% of people have a score in this range.
740-799: People with scores in mid to top 700s are in the range of Very Good. Borrowers with scores in this range will receive better than average interest rates from banks and lenders. 25% of people have a score in this range.
800-850: The top of the scale is considered Exceptional. Individuals with a score above 800 receive the best rates from lenders. Around 21% of people have scores between 800-850.
Statistically speaking, most people’s scores fall between the range of 600 to 720.
Why Your Credit Scores Matter
Credit scores are used by lenders as a decision-making tool to anticipate what type of borrower you’re going to be. They are sometimes referred to as “risk scores” because it is a direct signal of what types of risks you bring to the table.
That being said, it is your scores that determine if and how you’ll qualify for a loan, and if you do, the interest rate of the loan.
Your interest rate is a proportional amount of the amount loaned and often expressed as an annual percentage. This is the dollar amount you are paying in addition to the money you borrowed.
The higher your score, the lower you are as a risk to the lender. This will also mean your interest rate will be lower. This is how a good score can be the difference between hundreds or even thousands of dollars in savings for you. People with lower scores often pay higher interest rates and fees as they present a higher risk of default. When a customer defaults, the lender loses that money.
A good credit score could also mean you can qualify for higher balances on cards or borrow more money in general. Think of it this way: Your credit scores are very similar to a report card, but instead of the traditional letter grades, you are rated within a scoring range. Your credit score, or grade, is generated when a lender requests it from the CRAs.
Every time you set a goal for yourself or your trucking business, like growing your fleet or purchasing a new piece of equipment, your credit will most likely be a part of that process.
Credit scores alone are usually not the only thing lenders will look at when you are applying for a loan. The credit report itself will also contain important details that will be taken into consideration. These same factors are what help determine your score itself.
What Affects Your Credit Score
Payment history – This shows if you’ve made your payments on time or at all.
Credit utilization rate – How much of your credit you are using on your credit cards.
Type, amount, and age of credit accounts – Lenders do want to see diversity on your credit report. Having a good mix of credit cards, a car loan, maybe a mortgage on their helps your score.
Total Debt Owed – This is the amount you owe in loans and how much is on your cards.
Bankruptcies, Child Support Due, Public Records – Filing for bankruptcy or having a large amount of delinquent child support will hurt your score.
New Credit Accounts – Opening a lot of accounts in a short period of time can hurt your score. If you have gotten too many loans or credit cards in a 2-year period, it can ding you.
Hard Inquiries – The number of times a lender has requested your credit information will affect your score. These searches stay on your report for 2 years.
How Your Score Is Graded:
Biggest Factor: Your Payment history on your loans.
Very influential: Your debt owed in total.
Fairly influential: Length of credit history.
Less influential: New credit and credit mix, amount of hard inquiries (the types of accounts you have).
Monitoring Your Credit
Even if you’re not applying for a loan anytime soon, it is still important to regularly stay on top of what is going on in your credit report.
Checking your score yourself can be done in many different ways for free and with no risk to you. The most popular and free way to monitor credit is probably Credit Karma. Users receive weekly updates about their score via a report.
Experian, Equifax, and TransUnion all offer free or premium credit monitoring systems that allow you to see your score and report. Users receives score updates on a monthly basis. In addition to monitoring, users can also “freeze” or lock your credit report to ensure that no one is opening accounts via a stolen social security number.
Monitoring your credit is the best way to ensure that the information is correct, up to date, and to check that you haven’t been a victim of identity theft. If you do see something on your credit report that you don’t recognize or is inaccurate, you can report it and get it removed with a little elbow grease.
Outside of security, knowing what is on your report also will help you when it comes to applying for loans or financing down the road. Knowing your score and understanding what it means for your approval odds will make your application journey much smoother.
My Credit Score is Low, How do I Fix That Fast?
The first step you want to take in fixing your report is making sure all the information on the report is accurate. Getting incorrect information removed from your history can take time, but as we mentioned before, it can be done.
If all the information on your report is correct, the best thing you can do for yourself is to focus on fixing the areas of your credit that have the biggest impact. Paying down your balances to shrink your credit utilization will help your score the most. Another thing you can do is wait for any pesky hard inquiries to fall off your report.
Hard inquiries can ding your score up to 10 points! While it might not seem like a lot, having 3 or 4 inquiries from around the same time fall off your report will give you a good boost.
Another thing you will want to consider is your credit history and number of accounts. If you do pay down your debt, make sure to keep your accounts open. The more accounts you have, the better your score will be. Additionally, keeping accounts that are in good standing open will help your score and deepen your history over time.
Semi Truck Financing and Credit
When shopping for a loan for a new truck, you need to keep your record in mind. A lot of truckers actually harm their score by applying willy-nilly to any and every company that promises they can get them the truck of their dreams.
What actually happens is a LOT of hard inquiries on your report. Remember, each hard inquiry can ding you about 10 points. If you even apply to 4 places, that’s enough to drop your score a whole credit grade.
Dealers are another avenue you want to be wary of in regards to credit. When you “apply” or see if you can get financed for a truck you like at dealership, what that dealers often do is send your information around to any bank or company they think you can be approved. Again, this leads to many unnecessary and damaging hard inquiries.
Don’t worry, there are companies out there that can get approved for Commercial Truck Financing without harming your credit. We here at TopMark Funding can help you by getting you pre-approved with just a soft inquiry. This way, you can see your rates without any damage done to your score and without any commitment from you.
For these reasons, it is important for you to be familiar with both your credit score and what financing companies can offer you at your current rating before you ding your score. Do your research and make sure you are making good choices for your business. If you want to read our in-depth Semi Truck Financing guide, you can check it out here. Being knowledgeable about the process and what it means in terms of credit will help you make the best choices.
About TopMark Funding®
We’re a semi-truck and commercial vehicle financing company located in Roseville, CA. We specialize in commercial trucking and heavy equipment. With 20+ years of being in the commercial vehicle and equipment industry. Client satisfaction is our top priority at TopMark Funding®.
Our mission is to become your long-term financial partner by helping you grow your business and fleet. We’re not here for the short-term, we’re on long-haul with you. We achieve this by being your funding advisor, guiding you towards the best financial decisions for your trucking business.
Get Pre-Approved Today
If you’re in the market for a new or used semi-truck, commercial truck or vehicle we can help finance it for you. We have great rates, low down payments, and flexible monthly payments. We have lease and loan options for several different types of vehicles and trailers.
Fill out the contact form or give us a call at (866) 627-6644. One of our finance specialists will contact you as soon as possible to go over your truck financing needs and learn more about you and your business goals.