As a business owner, your personal credit score will impact your ability to get a business loan, secure credit lines, and even lease office space. While credit score requirements vary by institution or credit card provider, if your credit score is less than perfect, there are steps you can take to repair it!
Credit Reporting Agencies
There are three different credit reporting agencies – Experian, TransUnion, and Equifax – that provide credit reports based on your financial history. This information will include payment history, outstanding balances, and new credit applications. Creditors are not required to report to all three credit bureau agencies which means that each report may show different results.
Studies show that 1 in 5 people have credit report errors affecting their score. Therefore, the first step towards understanding (and fixing) your score is assessing what’s reported on your credit. You are allowed one free credit report per year, and you can request it by accessing Annual Credit Report.com.
Your Credit Score
There are five items that make up your credit score, each with a different level of importance:
- Utilization – 30% – How much of your available credit is spent
- Length of credit – 15% – The age of your accounts and credit history
- Credit inquiries – 10% – The number of times you’ve recently requested a credit check
- Payments – 35% – How often you pay your bills on time
- Number of tradelines – 10% – How many different types of accounts do you have (car loans, credit cards, mortgages, etc)
Credit scores can be broken down as follows:
800-850 Excellent
740-799 Very Good
670-739 Good
580-669 Fair
300-579 Poor
How to Repair Your Credit
For some, disruptive life events like bankruptcy or divorce have had a major impact on a credit score. For others, missed payments during a difficult time may have resulted in bills being sent to collections agencies. Whatever the reason, it is good to take steps to repair your credit sooner rather than later.
Understand Your Monthly Budget
Understanding your monthly budget is helpful because it outlines how your income will be used to pay your bills. Budgeting is a great way to help you understand where your money is going and enables you to prioritize the things that need immediate attention. This will also help you spend more carefully in the future.
Make Payments on Time
Making payments on time is the most critical factor in improving your credit score. Payment history makes up 35% of your credit score. Pay down the credit accounts that have the highest interest rate first. Know what recurring bills you have and their dues date. Set up automatic payments or reminders to ensure your payments get made on time. Late payments can stay on your credit report for seven years.
Reduce Your Credit Utilization
Credit utilization makes up 30% of your credit score and is the second most influential factor in your credit score. Credit utilization is how much credit you have used compared to your total available credit. The ideal goal is to stay under 33% utilization on a single line of credit. Pay down your balances as much as possible to improve your credit utilization ratio. If your credit is in good standing and you have limited credit, ask for an increase. This will lower your utilization and increase your credit score.
Avoid New Credit Inquiries
Applying for new credit (and having your credit checked) can negatively impact your credit score. Be picky and limit the number of times your credit is checked in a 12-month period. An exception to this rule applies when you are loan rate shopping. If you have multiple inquiries on the same type of loan within two weeks, they can be treated as one inquiry. If you are trying to make a big purchase, plan ahead and ensure you don’t have inquiries on your credit line that may reduce your score.
Length of Credit
Your length of credit history makes up 15% of your credit score. A long record of decent credit suggests to creditors that you will continue this behavior in the future. Generally, seven or more years is considered a reasonable length of credit. Keep accounts open and in good standing to help improve your credit.
Number of Tradelines
The number and types of credit on your report should be a mix of revolving and installment tradelines. Revolving tradelines include credit cards and lines of credit. Installment tradelines include mortgages, auto loans, and student loans. Having a mix of both is best, but you should only open the accounts you need. You don’t want too many accounts because that may make you seem overextended.
Your credit score is essential to your ability to run a successful business. For more details, watch the full workshop with Christina Ramsdell, Certified Business Advisor at the Maine SBDC at Androscoggin Valley Council of Government! The Maine SBDC can help you understand what is accessible to you and your business, and connect you with professionals who can help you repair your credit score.