Online Credit-Rating Reports Are Not Always Credible
Part of running a business is knowing who is and isn’t a good credit risk. Two Internet services can help you get a snapshot of your customers’ credit-worthiness.
Experian (https://www.experian.com) and CreditFYI (https://www.creditfyi.com) provide business credit reports over the Web. Both use the same raw data, which are collected by Experian, but they report the data in very different ways. Neither provides a great deal of detail, but Experian provides more.
Experian, formerly TRW, is a leading collector of consumer and business data. It provides consumer and business credit reports to companies of all sizes.
CreditFYI, which is designed to serve the small-business market, is a strategic partnership of Experian; Fair, Isaac & Co.; and Net Earnings. Experian provides the raw data, Net Earnings provides the Internet services, and Fair Isaac provides the analysis that determines the ratings.
Both CreditFYI and Experian charge $14.95 for a snapshot report and $5 if only limited information is available. Anyone with a credit card can request and obtain a report on the Web; however, you have to indicate acceptance of their policy that you will use the data only if you have a legitimate business reason.
After checking the credit of several companies using both the Experian system and the CreditFYI service, I came to the conclusion that this information, while potentially useful, should be viewed with some skepticism. Even if a company is found to be a “high risk,” it doesn’t necessarily mean it won’t pay its bills on time. What’s more, in several cases I found a disparity between the reports from CreditFYI and Experian even though they are based on the same data.
Several of the businesses I looked up in CreditFYI were rated high-risk, yet it provided no specific data to back up that assessment. Even more puzzling, in several cases a company that was considered high-risk by CreditFYI was ranked “acceptable” by Experian.
The reason for the discrepancy, according to Net Earnings Chief Executive Mike Grossman, is that CreditFYI runs the data through an analysis system developed by Fair Isaac. The analysis is “based on the same types of models that the leading banks use to evaluate credit,” he told me. Fair Isaac, according to the company’s Web site, “employs the industry’s most sophisticated analytic techniques in building custom application-scoring models, giving lenders increased power to distinguish between applicants and make informed and fair decisions.”
Each CreditFYI report provides a ranking on how the company compares with other U.S. small businesses. And it reports whether the company is a low, moderate, high or very high risk. The report also briefly summarizes the company’s credit history and provides a list of explanations you can use if you choose to decline credit or give less favorable credit terms than requested.
The public relations firm that represents CreditFYI gave me the names and phone numbers of several customers so I could find out how they liked using the service. Normally I don’t follow up on leads like these because they’re certain to be people who are satisfied customers. I made an exception in this case, but first I ran a report on each business to see how it was rated.
Harry Hull, owner of H2B, a small San Francisco-based company that makes relaxation pillows, was a happy CreditFYI customer, at least during the first half of our conversation.
“Most of our accounts are relatively small,” he said, “and we find the cost and complexity of other credit reports to be daunting.” He likes using CreditFYI because it is “very simple.”
“I only checked about two or three accounts,” he told me, “but the ones I checked out completely matched our experience. One was good and one was terrible.”
I asked him if he had ever run a report on his own business. He hadn’t. When I read him his report, he was shocked. H2B was classified as high-risk.
According to the report, 83% of U.S. small businesses “have a better credit history than H2B Co.” But there was no detail to back up that analysis. In fact, the little data provided showed just the opposite.
The credit history for Hull’s company showed that payments “recently have been made on a timely basis” and that there were no reported bankruptcies, tax liens, collections or judgments. The report also said the company had been in business for four years, but Hull said he had been in business since 1989.
I also checked out Hull’s company using the Experian service, which rated it acceptable. Experian reported at least some detail about its credit and outstanding balances. It said that Hull is “100% current” and that, on average, his bills are paid “0 days” past their due date, hardly what I’d call high-risk. Experian did have two gross inaccuracies. It reported Hull’s sales at $7.5 million (he says they’re closer to $570,000) and that he has 48 employees. He has six.
Hull confessed that he would have been reluctant to extend credit to a company listed as high-risk, but that “after this experience, I would be much more cautious about interpreting this type of report.”
Other owners I spoke with said their assessments as low or moderate risks were fair.
“People want something simple,” Net Earning’s Grossman said. “That’s how the vast majority of small businesses have responded.”
Besides, the alternative is often little or no data at all.
After looking at several credit reports from Experian and CreditFYI, I’m not as confident as Grossman about the reliability of Fair Isaac’s numeric assessments. Maybe such data are useful to large lenders who look at thousands of loan applications a year, but I’m not sure it’s all that useful for a small-business owner. Call me old-fashioned, but if I were going to consider a company for credit, I’d rather have at least some raw data about its credit history instead of a composite score based on its industry and some computer analysis. Given a choice between the CreditFYI system and the Experian database, I’d go with Experian because it provides more detail.
Find out more about small business and technology at The Times’ Small Business Strategies Conference Oct. 17-18 at the Los Angeles Convention Center. You can e-mail Lawrence J. Magid at magid@latimes.com and visit his Web site at https://www.larrysworld.com. On AOL, use keyword “LarryMagid.”
