Are surety bonds based on credit?
Surety bonds are not based on credit. In fact, surety bonds have nothing to do with credit whatsoever! Nonetheless, there is a connection between your credit and the premium cost of a surety bond. So let’s take a closer look at what that is.
Sometimes it helps to know what something isn’t before you can truly understand what it is. In other words, we need to dispel any myths first before we can discuss the reality behind the score. But first, what exactly is a surety bond?
A surety bond (or guarantee) involves an entity (the Principal) that has some sort of contractual obligation (a legal commitment). The entity needs protection from those who might fail to adhere to their end of the contractual obligation. In this case, a surety bond covers the cost of damages if others fail to meet their commitments. In essence, a surety bond acts as insurance for the Principal.
An example would include a partnership agreement in which one partner agrees to finance the other partner’s share. Without any sort of backing or security from that partner, there is no protection or guarantees for either party within that agreement. There is only risk and uncertainty. So the need exists for all parties involved in such agreements to have assurance their interests will be protected should something happen beyond any one person’s control (such as bankruptcy, death, or disability).
Can you get a surety bond with no credit?
As a general rule, yes. However, there is a catch here. You can get bonded without credit if you are willing to pay for an “a” rated bond (higher than the average cost of the bond). Since surety companies know that most companies will not be able to afford this higher premium, it, therefore, follows that fewer companies will be willing to accept this higher rate of risk and therefore deny them business. Does that mean then that all bonds require some sort of credit check?
No, but you’ll need what is known as a hard inquiry on your credit report before you can qualify for any sort of bond coverage. A hard inquiry means that surety company checking with the three major credit bureaus (Equifax, Experian, and Transunion) to verify the information you’ve given on your application. This inquiry might lower your credit score by up to 5 points.
Do surety companies check for anything other than just an active line of credit?
Sure, surety companies want proof that you can repay any obligations in case something happens.. So they also look at things like.. # of open trade lines (or accounts) with major banks or financial institutions # of open revolving charge accounts # employed full time in past 2 years Bankruptcies, liens, judgments in previous 7 -10 years Length of time current employment Self-employment in past 7-10 yrs A Personal Guarantee
But if I do have bad credit does it mean I don’t qualify for a bond?
Not necessarily. If you have bad credit, it’s possible that you could qualify for coverage with an “e-” or “d-” rated bond (less than the average cost of the bond). The surety company may charge more to take on your risk, but these bonds also come with higher premiums should everything go according to plan; thus representing less overall risk should something arise. Some companies might reduce the premium even further if you are willing to sign up for automatic payment of invoices by direct debit from your bank account.
So there is not much I can do about my poor credit score then?
Actually yes, there is one thing you can do to improve your likelihood of qualifying for bond coverage at all! Most applications require the applicant to supply a personal credit profile (credit report) as part of the application. However, you can request your own copy and address any issues/inconsistencies with the information on your report before applying for bond coverage.
Some inconsistencies might include: Identifying information that doesn’t match other documents—for example, if your social security number is incorrect or missing from your account Recent addresses that don’t appear in prior employment history Long-ago bankruptcy filings that still show up as open accounts Long-ago liens and judgments that will never result in collections
How do surety companies check my credit?
Surety companies can check either manually or automatically. Manual checks mean someone from the company must physically go to each reporting agency and check the credit report for inconsistencies or errors. Automatic checks are conducted by up to three agencies that have licensed information instead of just one, thus reducing the time it takes for approved applications to be issued.
A company with a negative balance of trade can choose to pay money in exchange for protection against losses. That’s where the surety bond comes into the picture. Surety bonds are the most popular alternative financial obligations that enable companies to improve their balance sheets by taking on deferred liabilities. These options help protect trade creditors from nonpayment and out-of-pocket expenses incurred during lawsuits, bankruptcies, and investigations pertaining to fraud or theft once an individual or company has defaulted financially.