Most consumers know that their ability to borrow money is heavily influenced by their credit score, but maintaining a high score (and staying abreast of changes in how scores are determined) is even more critical for entrepreneurs, who often don’t know that their ability to borrow for their business is linked directly to their personal credit. While credit scores can seem like a black box, there are steps that business owners can take to monitor and potentially improve their credit scores.
“Credit scores are a dynamic interpretation of several conditions around consumers’ performance and access to credit, and those are subject to change and adjustment at the whim of FICO,” says Charles Green, managing director of the Small Business Finance Institute and author of Banker’s Guide to New Small Business Finance (Wiley Finance, 2014).
A prime example is FICO’s launch of FICO Score 9 in 2014, a revised formula that excluded medical debt. Entrepreneurs with outstanding medical bills could see their credit scores rise by 25 points under this new formula, which could make their applications for business loans more credit-worthy.
Credit scores depend on a number of factors, including a consumer’s past record of payment, how much of available credit a consumer uses and borrowing patterns, Green says. Borrowing patterns include how many credit applications you file in a given period and are weighed based on how many applications are made in a specific period of time.
It’s also important to understand how the various factors that tie into a credit score are weighed. For example, FICO weighs revolving credit such as credit cards more heavily than term loans such as mortgages, car loans, and student loans in their scoring methodology, according to Green.
Because growing businesses often struggle to maintain predictable (and sufficient) cash flow, it can be extremely advantageous to maintain a high credit score so that business credit can be accessed at favorable terms when needed. Toward that end, Green notes that the bottom line in maintaining a clean credit report and high credit score involves:
- Monitoring your credit report regularly by requesting a free copy annually from all three major sources (Equifax, Experian, and TransUnion), and obtain an additional copy just before applying for any type of credit, especially business credit.
- Fixing any mistakes by reporting them in writing to the credit bureaus, who must then investigate the issue and confirm the erroneous information with the source.
- Making all credit card, mortgage, and loan payments on time.
- Moderating your borrowing and maintaining lower balances on revolving credit accounts.
- Employing a strategic approach toward credit card use, including how many cards you have and closing out unused cards properly. (Keep a hard-copy of correspondence with credit card issuers verifying that the account had a zero balance and was in good standing at the time it was closed.)
By maintaining a clean personal credit report and monitoring that report regularly, you’ll ensure that you have the highest personal credit score possible, which can prove to be one of your business’s most precious assets.
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