How to Improve Your Credit Score
Tips for understanding and repairing a poor credit rating
Until your business has been around for a few years and has established a solid financial history and track record of its own, your personal credit rating will be linked to your business.
"Banks and other credit institutions look at small businesses--and particularly new small businesses--as the personal fiduciary responsibility of the owner," says Stan Lewczyk, a SCORE counselor in Orange County, Calif.
It's almost impossible for new businesses to be approved for business loans, lease agreements, credit lines and other financial transactions without relying on the credit history of the owner. As such, you need to make sure your personal credit is as solid as possible.
For that reason, it's important for business owners to make sure their personal credit histories are sparkly clean, and if they're not, owners must take steps to improve them. Here's how:
Check Your Credit
You can get a free copy of your credit report from each of the three major credit bureaus: Experian, Equifax and TransUnion. It's important to get all three because the reports can vary.
The best way to get your free credit report is to visit annualcreditreport.com, a site created by the three credit bureaus as part of the Fair and Accurate Credit Transactions or FACT Act. Other sites offer "free" reports, but they usually require you to sign up for a monthly service to get your free report.
Next, check your credit score, which is a number lenders will look at to classify you as a borrower. Your credit score is a number calculated by a formula, based on your credit report, and the higher the better. (Because each of your credit reports will be slightly different, your credit scores will be different, too.) One popular score, the FICO score, ranges from 300 to 850. A newer scoring model, called VantageScore, runs from 501 to 990.
For the most part, these credit scores are not free, but you can order them directly from each of the credit bureaus' websites (experian.com, equifax.com and transunion.com).
Improving Your Score
Once you check your credit reports and scores, you'll see where you stand and what you need to improve.
Fix mistakes: If there are errors on your credit reports, you can dispute these with the credit bureaus, and within 30 days they have to investigate. If your report is accurate today, that's great, but make sure you check at least once a year to ensure new errors don't arise. "Business owners have both the obligation and the right to review their credit report to assure that erroneous entries don't keep their FICO score from being as high as it should legitimately be," says Andrew Samalin, a certified financial planner with Samalin Investment Counsel in New York City.
Pay on time: You can't take away the dings on your current credit report. Only time, and making sure you pay on time in the future, will help. Thirty-five percent of your FICO score is based on your payment history, and lenders want to know they're going to be paid. "Past experience has shown that the way a small business pays its bills is closely linked with the way a business owner handles his or her personal consumer credit," says Marcus Bishop of FICO. Going forward, make sure you pay on time.
Lower your balances: Make an effort to keep your personal credit balances as low as possible. Your credit score takes into account the amount of credit you have available compared with how much you're using. The less you're using, the better for your score.
Keep older accounts: Your length of credit history is another factor. Keep your older credit cards open so you have a longer history to share.
Limit new credit: If you open up too much new credit at once, it will negatively impact your score. You don't want to appear desperate for money.
Use a variety of credit types: Showing a successful history with different kinds of borrowing, such as a mix of credit cards, installment loans and mortgages, can raise your score.
Make good credit your mission: There are plenty of online tools available to guide you as you try to improve your credit. Check MyFico.com, Quizzle.com and SBA.gov for help. "Good credit--even if your business doesn't depend on it day to day--is like insurance in some ways," says Quizzle spokeswoman Ann-Marie Murphy. "You may never need to use it, but it's sure nice to have available should you need to fall back on it."