Everyone knows the importance of good credit scores when it comes to personal finance. A low credit score can raise your interest rate on a home mortgage, and for some people, can even prevent you from being eligible for a mortgage at all. Unfortunately, as many small business owners have found, a low credit score can wreak havoc in your business pursuits as well.
For businesses that operate as a sole proprietorship, and even those formally organized as a Limited Liability Company (LLC) in their state, the individual credit score of the owner is still essential. When applying for business credit cards, vehicle loans, or uncollateralized lines of credit, issuers likely will still approve or deny based on the owner's credit score. Loans and credit cards also likely require the personal guarantee of an owner.
If your score is low, you may be offered an unfavorable interest rate, making the cost of doing business higher. Ultimately, you may find your loan or other application outright denied. To prevent such occurrences, it's crucial to take steps to protect individual credit scores, before you have a need for credit.
The Major Factors Influencing Your Score
Various factors affect your credit count, but not all have equal weight on your score. This knowledge helps focus your efforts when trying to fix your credit score and makes the task seem manageable and achievable.
Factors influencing your good credit score, in order of most substantial effect, may include:
- On-time payment history
- Overall usage of your available credit
- Length of credit history
- Types of credit you have
- Number of recent inquiries / opened accounts
According to Experian, on-time payment history accounts for 35% of your FICO Score and overall usage, another 30%.
How to Fix Your Credit Score If...
You Have No Credit
You might have no reported credit if you've lived outside of the country for an extended period or if you are a very young business owner. In either situation, you have to start building credit as soon as possible. There are specific debit and credit card products available that help users build credit by demonstrating on-time payments.
You Have a Credit History of Mistakes
Some people have a bad credit score from past mistakes. Mistakes might include late payments or balances over the credit limit of the account. In this situation, the first step is to rectify the problem and bring your accounts current. Unfortunately, even after doing that, the problem won't go away overnight. A late payment is reported on your credit report for seven years. Bankruptcy remains on your report even longer.
You Have Many Recent Applications
These stay on your account for only two years and don't significantly affect your score. However, you should still only apply for credit cards if you are relatively confident that you will be approved. Various websites, such as Credit Karma, can help you figure out your odds of approval before applying.
You Have a Lot of Debt
When it comes to your credit score, debt isn't a bad thing. Unused accounts aren't good as they might be closed down by the card issuer owing to nonuse. Unused accounts also might have the credit limit lowered to better match your spending habits, which can have an effect on your credit score.
When using credit though, if you have to carry a balance on the card, the credit usage rate should be below 30% of your available credit line. For example, if you have a credit card with a credit limit of $10,000, you should only carry a balance of 30% of that amount, or $3,000. Balances above this limit begin to have a negative effect on your credit score.