Keep Your Credit Clean

When it comes to managing your money, three little digits wield tremendous power over your future--and as with your cholesterol and your weight, you ignore them at your peril.

That's right. I'm talking about your FICO score, the number that tells credit-card issuers, mortgage lenders and other consumer finance companies how safe it is to lend you money.

As a business owner and entrepreneur, you're probably pretty savvy when it comes to negotiating credit terms with banks and vendors. Consumer credit is a whole different game, however.

'There are a lot of credit myths out there," says Dan Meder, vice president of business information services at Experian, one of the nation's three leading credit bureaus. 'Good credit is really about managing your balances."

Here are Meder's tips for maintaining a winning credit score:

1. How Do You Rate? Your credit report score, which can range from 300 to 850, depends on a number of factors, including your credit payment history, current debt, length of credit history, credit type mix and frequency of applications for new credit. 760 TO 850 EXCELLENT Lender typically will offer its best interest rates. 700 TO 759 GREAT You shouldn't have trouble getting loans at decent interest rates. 660 TO 699 FAIR You may qualify for loans but interest rates are likely to vary. 620 TO 659 POOR Interest rates will be very high, if you qualify. 619 and Below VERY POOR It is doubtful you will qualify for a loan.

   Pay your bills on time--every time. Stretching out payments to vendors can be a good way to manage your company's cash flow, but it's a bad habit to get into when paying your personal credit card bills. Any late payment is reported immediately to the credit bureaus, dinging your credit score, boosting your interest rates and making it difficult for you to get more credit. What's worse, it can affect your ability to get business financing as well.
2. Keep small balances on multiple cards. Unlike in the business world, where 'relationship banking" is often rewarded with lower rates, credit-card companies get nervous when they see a cardholder carrying one or two cards that are maxed out or with balances that are bumping up against the credit limits. 'If your balances are too high, there's a perception that you're living off credit," Meder says. Although you may want to charge everything on a single card to get as many reward points or frequent flyer miles as possible, it's a good idea to spread out your spending on multiple cards and stay well within your credit limits.
3. Don't shift your balances from card to card. It's tempting as CFO of your own business to take advantage of those zero percent APR offers that you get in the mail and to shift your balances to the card that's charging the lowest interest rate. But if you do that with your personal cards, you're flashing a warning sign to the credit bureaus that you don't have enough money to pay your bills. Says Meder, 'It's better to pay off debt than just move it around."
4. Don't apply for too many cards at one time. Your applying for too many personal credit cards, credit lines and other financing makes credit bureaus wary--even if you never use the money. You'll improve your credit score and obtain more credit if you build up your credit history over time and make your lenders feel as comfortable with you as a consumer borrower as they are about you as a business borrower. 'Apply for credit judiciously," Meder advises. 'A lot of inquiries in a short period of time indicates risk."
5. Don't file for personal bankruptcy. As a business owner, it's OK to fold your cards and start over. Consumer finance companies are less forgiving, however, and a personal bankruptcy filing can stay on your credit report for as long as 10 years. That's why, no matter what happens to your business, it's important to do whatever it takes--a second job, a loan from mom and dad--to pay your bills and keep your personal credit score intact. Beware of companies that offer to 'consolidate" your consumer debts. Settling with a lender for less than you owe will hurt your credit score for many years. And cutting up your cards to eliminate temptation will only make your credit score worse.

What should you do if your credit is shot? Don't give up, Meder says. Credit scores are snapshots of the past, not predictors of the future. There's no shortcut to reestablishing credit, but you can rebuild your credit history over time by making payments promptly, maintaining low balances and spending responsibly.

Rosalind Resnick

Rosalind Resnick is a New York-based freelance writer, entrepreneur, investor and author of The Vest Pocket Consultant's Secrets of Small Business Success.

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