The time to fix your credit scores is now. Do not wait until you need to borrow or you are bidding on a new project. Unless your business is incorporated and you have well-established completely separate business credit files, that means fixing both your personal, consumer credit score and your business credit score.
Myths abound regarding what affects your credit score. For example, although many believe you need a high income to have a high credit score, your income is not a factor used in calculating credit scores. Fortunately for business owners, there is plenty of accurate advice available on what to do to fix a bad credit score.
How to Check Your Credit Reports
Business credit reports are far more complicated because the credit bureaus each have multiple different scores and many types of reports. As in personal credit scores, higher is usually – but not always – better. Read What are the Credit Reporting Agencies for Businesses for details.
Only consumer credit reports could be obtained at no cost in the past. But it is now possible to use Nav to request a free copy of your FICO®, Experian, and D&B PAYDEX business credit reports. For more tips on how to improve your score, read How to Check and Repair a Negative Credit Score for Business Loans.
Soft and Hard Credit Inquiries Differ
Pulling your own credit report will not damage your credit score. It has no effect (except to help you improve your credit score and ensure there are no errors on your credit reports.) Only hard credit inquiries (also called hard pulls) affect your credit score.
There is much confusion over what inquiries are soft and do not affect your score and which are hard.
- Pre-approved credit card offers you ignore
- Background checks done by employers or potential landlords
- Your existing bank looks at your credit report
- Inquiries from insurance companies
- Checking your own credit report
- Responding to a pre-approved credit card offer
- Getting a new cell phone plan
- Applying for a car loan, mortgage, student loan or credit card
- You request a credit line increase on an existing account
- Paying for a rental car with a debit card
- Tenant screening reports done by landlords
- Getting a business credit card that requires a personal guarantee
- Setting up overdraft protection on your checking account may generate a hard inquiry in some cases
When lenders check your credit when you apply for a loan or credit card, their inquiry stays on your credit report for 24 months (25 for Experian) and is considered a hard credit inquiry. Too many of those can lower your credit score.
When Multiple Hard Inquiries Will Not Lower Your Credit Score
A single hard inquiry will reduce your credit score by 5 points or less for up to a year. Avoid multiple inquiries by not applying for credit too often. There are exceptions, though. According to myFICO.com:
“One exception occurs when you are “rate shopping”. That’s a smart thing to do, and your FICO score considers all inquiries within a 45-day period for a mortgage, an auto loan or a student loan as a single credit inquiry. This same guideline also applies to a search for a rental property such as an apartment. These inquiries are usually recorded by the credit bureau as a type of real estate-related inquiry, so the FICO Score will treat them the same way. You can avoid lowering your FICO Score by doing your apartment hunting within a short period.”
The reason hard inquiries lower your credit score is that people who urgently need money apply for a lot of credit cards or loans close together. That makes many inquiries except when rate shopping a red flag.
Keep Your Credit Utilization Rate Low
Small business owners need to keep very low credit utilization rates on both their personal and business credit cards. Multiple sources advise that it is necessary to keep your credit utilization score on personal credit below 7% to stay in the “very good” credit score range of 740-799.
Some recommend credit utilization percentages as low as 1-3% if you want an “exceptional credit” score of 800-850. What you do not want is 0% credit utilization. If all of your credit cards show no balance, you are not building your credit and your score will be lower.
Use both your business and personal credit cards and lines regularly, but keep them paid down or off. It is a myth that you need to carry a balance. To get the highest credit score possible, it is best to charge business expenses to your cards and trade lines and then pay them all off early every month.
Recognize that reducing your credit available increases your utilization rate. So if you need to close an account (such as when you sell a business and need to close the business credit card), first obtain another account with the same or higher available credit.
Find out when your bank reports to the credit bureaus and make sure you make your credit card payment before that date every month. If you pay your cards off in full each month, but they report before you make those payments, your credit utilization rate will appear higher than it is.
Regularly charging more than 25% of your available balance is a sign that you should request a credit limit increase. Even if it generates a hard inquiry that lowers your credit score in the short term, it will increase it long-term.
Minimize Using Teaser Rates and Balance Transfers
While transferring your balance from high-interest credit cards to new cards with low introductory rates seems like a good idea, it can backfire. To keep your credit score low, spread out how often you apply for any type of credit. Six months is often mentioned as a sufficient amount of time to wait between applications to avoid impacting your credit score.
The length of time you have credit history is important, so keep old accounts open. Pay off credit cards with the highest interest first. If they all have similar interest rates, pay off the card with the highest balance first because utilization of each account is also considered in credit scores.
Make sure you read the fine print and understand how payments are applied on each card. Some cards have multiple or deferred interest rates which jump if you do not pay them off in time.
If you do obtain lower interest cards, stop using the higher interest cards, but do not close the accounts.
Use Automated Payments and Reminders
Paying your bills and debts on time every time is an essential part of having a high credit score. Keep enough money in your checking account or balance on your credit card to use technology to pay them automatically. But do not forget to check your statements every month.
Late fees negatively affect your credit score as do unresolved overdrafts and charge-offs. If you want the highest possible credit scores, pay your bills early instead of on time.
Not All Lenders Report Positive Information to Credit Bureaus
When building your credit or managing your credit score, keep in mind that many lenders only report negative information. So having accounts with them cannot help you increase your score, but if you pay late or are in default, they will report that.
Many have opened accounts believing they would improve their credit score only to be disappointed. Each lender decides whether to report negative business credit card details on your personal credit report. The only way to know is to get them to tell you.
Will a Bankruptcy Prevent Me from Getting a Small Business Loan?
Although a bankruptcy will drop your credit score 100-200 points and stay on your credit file for 7-10 years, you can immediately start improving your credit if you’re willing to use alternative lenders and pay much higher interest rates.
While it will be more difficult to get a small business loan if you have filed a personal bankruptcy, it is possible. Because you may have less debt and cannot declare bankruptcy again right away, some lenders may even consider you less of a risk.
But you will have to shop around. There are steps you can take to indicate you are a better manager of your credit now. Bankruptcies need to have been fully discharged. The longer it has been and the lower you have kept your debt since then, the better.
There is a place on your credit report to submit a brief explanation of what major event caused your financial difficulties and how it is different now. Typical causes are divorce, hospital bills, extended illness, or a car accident.
When applying for a loan, attach a matter-of-fact statement regarding what caused the bankruptcy and explaining why that is no longer a concern. Be prepared to explain this unemotionally in person, as well.
It is likely that a loan after bankruptcy will have a higher interest rate or require more collateral. Do not acquire any debts until your bankruptcy is complete without talking to your attorney or you could jeopardize your case.
How to Fix A Bad Credit Score to Get a Small Business Loan
For more information, download our free ebook How to Fix Your Credit: Improve Your Chances of Getting a Small Business Loan.
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