How To Raise Your Credit Score
By Eugene DeSilva, MasterCard, and Jeanne Kelly, Credit Coach
When was the last time you checked your credit report and score? Do you practice healthy financial habits? Does your business?
Opening and running a business makes taking out loans and lines of credit a necessity. Once established, a company’s finances become separate from the owner’s personal finances, making way for the company to have its own credit score.
However, most small business owners are usually personal guarantors, so your personal credit score is just as important for obtaining the new lines of credit needed. You can read more about how to get the best rate on your loan in “Ability, Stability and Willingness to Pay Drive Business Credit Decision” on Bank of America’s Small Business Community.
Building and maintaining a healthy business credit score is much the same as taking care of your personal credit score. Not sure how credit scores are determined? FICO scores are used by 90 percent of lenders. Let us break down how they are calculated:
- 35% is Payment History. Pay your bills on time. Your score will suffer if your lender consistently reports your payments as being late. This aspect of your credit is the most important as it is essentially a grade on performance for paying back the funds you have borrowed. You will be ranked well in this category if you pay your bills by the due date.
- 30% is Balances vs. Lines of Credit. Your score will improve if you can keep each credit line paid down. A good rule of thumb is keeping balances 20 percent below credit limits. This category is ranked almost as high as your payment history, as it shows that you don’t spend beyond your means and are not “maxed out” with your credit lines. It may be time to review your budget if you chronically carry high balances.
- 15% is Length of Credit History. Don’t cancel credit cards that you don’t use that often. Keep the account open and use it to buy something small (office supplies or lunch with a mentor) once a quarter to keep it active. The longer your accounts are open and in good standing, the more points you will get on your score, as it proves that you can be in a “long term relationship” with a line of credit.
- 10% is Different Types of Credit. It’s good to have a few different types of credit open, from credit cards to mortgage loans. Proving that companies trust you now will help more and different companies to trust you in the future.
- 10% is New Credit. If you open several accounts in a short period of time, you could be deemed high risk, especially if you don’t have an established credit history. Try to wait a few months between applying for new cards and loans. Opening up new lines of credit also means more inquiries to your score, which can be damaging (inquiries made by you on your own credit scores do not count here, don’t worry). While not a huge factor in your score, every point into your score matters.
Save yourself thousands of dollars and enable your business to grow with loans and credit lines by:
- Practicing healthy financial habits and checking your credit report twice a year
- Requesting and reviewing both business and personal credit reports
- Correcting any errors in a timely manner.
You work hard as a small business owner – don’t let silly mistakes cost you money.
This month, we will be part of a Google Hangout on “Factors that Influence Credit Decision” with other small business influencers. Please revisit this post for date and time and participate.