According to recent statistics, an estimated 30 percent of Americans have poor or bad credit. Having bad credit due to unexpected bills and poor financial decisions can have an effect on various major purchases. But bad credit can affect more than just your ability to purchase a new home or finance a new vehicle. It can also have an impact on your ability to obtain a surety bond. Here's what you'll need to know if you need a surety bond for your business and have less-than-stellar credit.
Bad Credit Means Higher Surety-Bond Premiums
Just as having bad credit can result in higher rates for car loans and mortgages, a low credit score can also result in higher surety-bond premiums. Like lenders and other financial agencies, surety companies assess a potential policy holder's overall financial risk based on their credit score. The lower the risk, the lower the offered bond premiums are likely to be. In the case of someone with a sub-prime (below 620) credit score, that person can expect to pay significantly more in bond premiums than someone with a prime (above 740) credit score.
While commercial surety bonds are heavily influenced by your credit score, court bonds are usually not subject to the same level of influence, making them somewhat easier to obtain than a typical surety bond. However, surety companies may request that the policy holder accept a joint control agreement with an attorney as a condition of underwriting. Such agreements are commonly used to further secure a surety bond against financial risk, especially when the policy holders have a poor or non-existent track record of financial responsibility.
Some Sureties May Say "No" to Bad Credit
Surety companies are just as averse to risk as any other lending agency, some more than others. It's not unusual for some companies to turn their back on customers with a checkered credit history. Most surety companies that serve the "standard market" are usually reluctant to service high-risk customers, including those with poor credit scores or no established credit history.
Surety companies may also be reluctant to underwrite bonds for people who are currently undergoing a bankruptcy, although many are willing to reconsider once the bankruptcy is completed and closed. Those who've fallen behind on their child-support payments may also come away empty handed when it comes to surety-bond underwriting.
In addition, a bad credit score may prevent you from obtaining contract bonds, a common type of surety bond that guarantees a project's completion according to contract. These include payment bonds, bid bonds, and performance bonds.
Some Sureties May Require Collateral
In addition to paying a higher rate, some surety companies require those with bad credit to post a cash collateral before underwriting a high-risk surety bond. In most cases, the cash collateral is directly posted with the surety company and is usually equal to the bond amount. The surety company can also hold the collateral for a period beyond the length of the bond term, and this could be problematic if you need the collateral released shortly after the bond term ends.
Some companies keep their cash collateral in an interest-bearing account, although the amount of interest paid on the account depends on the interest rates offered. As Joshua Malone points out, most surety accounts don't accrue much interest due to recent low interest rates.
Having bad credit can get in the way of many straightforward financial decisions, including the underwriting of a surety bond. Fortunately, there are many ways you can increase your credit score and improve your financial track record. Doing so can help you secure better rates for future surety bonds from companies like NFP, P & C, Inc. and make the underwriting process much smoother later on.