How can I improve my credit score?
If you operate a small business, your personal credit score matters – a lot, actually.
Lenders take a very in-depth look at personal credit scores when deciding if they want to loan money to customers. It tells them how long you have been borrowing money, how many different kinds of credit you have and how reliable you are at paying it back.
When you apply for a small business loan, typically lenders want to see a score of 700 or higher, which suggests you’ve done a good job of repaying loans and credit card bills on time. A lower score won’t necessarily disqualify you but it might limit your choices and result in a higher interest rate or less favorable terms.
And it’s not just money lenders and banks who want to see a solid credit score. Your business is more likely to be approved for low-interest credit cards or those that offer rewards for your purchases if you’ve maintained solid credit over the years. It can also affect business relationships with landlords, insurers and a host of others. Good credit will also lead to earning better terms and agreements from your suppliers and vendors. If they can trust that your business is financially stable and you’re capable of repaying debts in a timely manner, they’ll be more comfortable forgoing prepayment and allowing you to purchase on credit.
Ready to begin increasing your score? Here are five things you can do:
1. Pay your bills on time. As simple as it sounds, late or missing payments will hurt a credit score. Defaulting on a loan inflicts even greater damage. The single most important thing you can do to improve your score is to make on-time payments until a debt is paid.
2. Limit the amount of credit you use. It’s hard to improve your credit score if you’ve maxed out your credit. Try to use less than 30 percent of the credit available to you. That demonstrates your ability to responsibly manage debt, which makes you a lower credit risk.
3. Diversify your credit. Your credit score may get a boost if you use several forms of credit: a mortgage, credit cards and a home equity line, for example. That illustrates your ability to juggle multiple payments at once. Again, don’t max out each form of credit, but using an assortment of options shows you are capable of governing your debt.
4. Separate business and personal credit. Many small business owners use their personal credit to pay for business expenses. This is a bad idea for several reasons, some detailed here, but in the early days of COVID-19, some businesses had trouble qualifying for a PPP loan because there was not a clear delineation of their finances. Don’t wait for an emergency to make this a priority.
5. Check your credit report for errors. One in four credit reports contain incorrect information. You may increase your score if you find and correct errors – especially for accounts that don’t belong to you or in erroneous collection efforts.
Now, more than ever, it’s important to get your finances in order. Access to credit during an economic downturn can enable your business to take advantage of opportunities that financially strapped companies are forced to pass up. This won’t happen overnight but if you continue to work at it and make adjustments, both you and your business will benefit in the long run. Your credit score has always been one of the most prominent factors while being evaluated for a loan and will continue to be part of most business decisions going forward.
- Why it's a good idea to check your credit report every year
- How to build a financial nest egg for your business