Credit Information on Individuals

April 13, 2006

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Let's take a look at gathering credit information on individuals. The information you'll gather will depend upon whether the credit is a credit card, a check, or some other type of credit.

Credit cards. Accepting credit cards is a fairly safe credit risk for you to take because the risk is on the credit card company. That's one of the reasons why you're paying them 2.5 percent to 5.5 percent of your credit sales. The company issuing the card takes responsibility for checking the cardholder's credit rating, and for collecting the bills. As long as you follow the credit card company's procedures (checking the signature and expiration date on the card, for example), you should be able to eliminate the risk to yourself.

Checks. Accepting checks involves more of a risk than accepting credit cards because the check could bounce. If the check bounces, you — not the bank — will be the one left holding the bag. When you receive a check from a customer, you should take the following precautions:

Make sure that the check is signed and dated, that the amount is properly filled out in both places, and that the payee line is either filled in or left blank for you to fill in.
If you don't know the person giving you the check, ask for a driver's license, a phone number, and a credit card. Take down the driver's license number; you might need it (and the phone number) if you have to track him or her down later. The credit card is just for you to see, and to satisfy yourself that the customer was able to establish credit somewhere. In fact, don't write the credit card number down on the back of the check — that's illegal.
Look for hints that something may be out of order. Is the customer's address pre-printed on the check? Does the address on the check match the address on the driver's license? If you belong to a merchant's association or some other group that gives you access to a bad check list, call to find out if the customer is on the list. (In fact, you might consider joining such an association for that very purpose.) If that isn't an option, ask questions of the customer until you're satisfied that everything is in order. If the customer's answers are insufficient, don't accept the check.
If the check is for an unusually large amount, call the customer's bank to verify that sufficient funds are in the account.

Other credit. If you offer credit terms to an individual other than by check or by credit card, such as a lawyer who sends the bill after services are rendered, you can get a credit report on the individual that will give you information about his or her credit history. These reports can be obtained from any of the credit reporting firms, such as Experian or Equifax. To find a credit firm, look in the Yellow Pages under "Credit Reporting Agencies," or some similar listing.

Before you can get a credit report, you must have permission from the customer. The permission does not have to be in writing; it can be oral. There are, however, two exceptions to the rule that you have to get permission from the customer. If you already offer open account terms to the customer or if the customer owes you money, you don't have to get permission before you obtain the credit report.

While a credit report can be helpful, it is not infallible. It shouldn't, therefore, be your only source of information on the customer. If possible, you should try to talk to other businesses that may have extended credit to the customer. The amount of trouble you're willing to go to for information will depend upon the amount of credit you're planning to give. If the customer's credit limit is to be, say, $100, you may find that it's not worth the trouble to track down more information.

Warning

If you run a credit check on an individual, and the report turns up nothing, warning sirens the size of Montana should be going off in your head. A report that turns up nothing is commonly a sign of what is referred to in the industry as a "credit criminal."

By "nothing," we don't mean that the person has had no credit problems. We mean that the report shows no credit activity whatsoever: no applications for credit, no credit checks, no anything.

Of course, a lack of any information could mean something else. It could mean that the individual is just starting out and hasn't built any credit. As with any credit report, it should not be the only information you rely on. And, if you suspect that the individual is a credit criminal, never accuse him or her of it.