In his book The Tax & Legal Playbook, CPA and attorney Mark J. Kohler targets the leading tax and legal questions facing small-business owners, and delivers clear-cut truths, thought-provoking advice, and underutilized solutions to save you time, money, and heartache. In this edited excerpt, the author offers quick tips you can use to start improving your personal credit score, which has a direct impact on whether you can obtain corporate credit.
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Corporate credit is the ability of a company to obtain its own loans under its own credit score. Thus, a company (such as an S corp or LLC) can apply for a line of credit and, without the owner’s personal guarantee, use the money to expand its business. The owner of the company isn't personally liable for the credit line, and their personal credit score has nothing to do with the company’s ability to obtain credit. However, in some instances, having a good personal credit score can expedite the process of obtaining corporate credit.
Is it possible to obtain the corporate credit described above even if your personal credit score isn’t great? Yes, but it takes time. A quality corporate credit-building strategy will typically include a plan to improve or repair your own credit score at the same time. The practical reality is that it can take a lot longer to build corporate credit without having good credit yourself. The sooner you repair your own credit, the faster you’ll be able to obtain corporate credit lines.
Now, don’t be dismayed. Some of you reading this may question your ability to succeed in this strategy because you have a low personal credit score. But there's hope! You truly can improve and repair your credit score over time.
First, remember to be patient when repairing your credit score. Rome wasn’t built in a day, and the same adage applies here. Your quest to obtain credit lines to build your business is achievable; stay committed, and you’ll see the benefits unfold over time.
The following seven steps aren’t an inclusive list of how you can improve your score, but they are recognized by many experts to be the most important steps in building your personal credit. Take them to heart when reviewing your personal credit score and credit-use habits.
1. Employ a credit reporting service. Signing up with a credit reporting service can be very important for repairing your credit and receiving identity theft alerts. The company will give you constant updates regarding your credit and allow you to pull regular credit reports to observe any activity on your credit profile. It may even offer services to remove negative items from your credit. However, it’s important to do your research and use a reputable, affordable company with a proven track record. Historically, this industry has been fraught with scam artists and frauds.
2. Understand credit reporting. Take the time to understand in detail how your credit score is determined so you can implement the proper strategy.
3. Manage your payments. Don’t be 30 days or more late on any payments. Although being less than 30 days late may cost you in late fees and higher interest rates, it won’t affect your credit score. If you're 30 days late, it can affect your credit score for up to nine months. Paying 60 days late can affect your score for up to three years, and being 90 days late can damage your credit for up to seven years.
4. Know how much you owe. Utilization ratios are very important to credit reporting agencies. “Utilization” refers to how much of the available credit a consumer is using on a credit card. Using more than 50 percent of your available credit on a card can negatively impact your credit score. Using less than 30 percent of your available credit can actually increase your credit score. Many experts caution consumers to never use more than 80 percent of the available credit on any particular card. This is considered the same as maxing out the card, and it will have an even greater negative impact on your score.
5. Keep your accounts open and use them. Whenever possible, don’t close cards or accounts. An older credit card has a very positive impact on your credit score. Reporting agencies want to see that consumers have a good track record with credit card companies. Agencies will typically calculate the average age of accounts, which can have another major impact on your credit score. Moreover, it’s important to regularly use the accounts, even minimally, to prevent a credit card company from arbitrarily closing the account and to show stability on the part of the consumer. Even if there are monthly or annual fees to keep a card open, it can be well worth the cost to increase your credit score.
6. Use good types of credit. Making timely payments on a mortgage or auto loans shows stability and a good payment history with “quality” types of loans. Experts generally recommend you stay away from department store cards because of their higher interest rates and the tendency they may show to make impetuous decisions at the register. Moreover, these types of credit cards aren’t associated with wealth- or asset-building, but rather consumer debt, detracting from your credit score rather than building it.
7. Minimize new credit inquiries. Only apply for credit when building credit or if you need it. Turn down point-of-purchase credit card offers. Too many of these types of cards will have a negative impact on your credit rating.