How Does Your Business Rate?
Be mindful of these credit-score killers.
Your credit score is the number on your credit report that helps lenders or others predict how likely you are to pay any credit accounts on time. When we talk about a "credit score," we mean your FICO score, which was developed by the Fair Isaac Corporation.
According to FICO, business scores above 750 are very good and a sign of good financial health. A business credit score below 750 can indicate a higher risk, which could lead to you being denied credit or a higher interest rate and lower credit limit if you are approved.
So what makes a credit score go down, and how does this affect my business credit?
Many people don't realize that whenever someone checks their credit, their credit score goes down. This goes for your personal credit score and your business credit score. There are some signs you can look for to see if your credit score is tanking:
- If you are looking for a job, potential employers may do a credit check on you. This will cause your score to go down.
- If you are applying for credit for your business and your credit is checked, your score will go down each time your credit is checked.
- If you apply for credit anywhere--whether it's in person, online or through the mail--and your credit is checked, your score will go down regardless of whether you are approved or denied.
- When you look for a rental space for your business, a landlord will most likely check your credit, lowering your score.
- If you or your business has ever had an account placed with a collection agency, the original creditor or the agency can check your credit occasionally in order to continue to try and collect from you. Each time they do this, your score goes down.
Another thing to be aware of is that your score may help determine how big a deposit you may be required to have on a credit account--such as telephone, electricity or fuel services--if you cannot get approved.
Lenders, which can be anyone from whom you want to obtain credit, look at a score when deciding if they should charge you interest or give you a credit limit, and how much that should be. Having a higher score helps you to obtain lower interest and a higher credit limit.
Having a good credit score for your business can help you save money, which is something we all need to do in this economy. Each credit agency has its own score for your business because each agency has different things reported to them--some creditors look at all three agencies, while others look at just one.
You can easily improve your business's score by improving how you handle your business credit. To do this it may be helpful to you to know the five parts of your FICO credit score:
- 35 percent of your FICO score is based on your payment history
- 30 percent is based on how much you already owe others
- 15 percent is based on the length of your credit history
- 10 percent is based on new credit issued to you
- 10 percent is based on other factors such as what types of credit are listed on your credit report.
At some point, almost every business owner needs some type of credit. Try to avoid using your personal credit history or personal guarantees and work on building a good business credit profile now, before you really need it.
Michelle Dunn is an award winning author and columnist and has been called the nation's authority on collecting money. She is the founder and CEO of Michelle Dunn's Credit & Collections Association, one of the top 5 women in collections, and one of the top 50 most influential collection professionals in the industry.