Essentially, it’s a three-digit number that’s linked to your Social Security number and shows how likely you are to repay debt. When you apply for a credit card or loan, lenders will use your personal credit score to determine whether or not to approve you and what type of interest rates and terms to offer you. If you are a business owner, you should know that your personal credit score can play a role in your business credit score, which is tied to your Employer Identification Number and can help you secure funding for business purposes. Therefore, it’s important to keep your personal credit score as high as possible.
How to Improve your Personal Credit ScoreFortunately, there are a number of ways you can improve your personal credit score including:
- Pay your bills on time: By paying all of your bills on time, you can position yourself as a responsible borrower. Believe it or not, even one late payment can lower your credit score so you can’t afford to miss a payment on your mortgage, utility bills, etc.
- Apply for and open new credit only as necessary: While you may be tempted to apply for and open new credit any time you need to make a large purchase, doing so can take a serious toll on your credit score. Try to apply for and open credit cards only when you really need to.
- Check your credit reports: Check your credit reports from Experian, Equifax, and TransUnion, the three major consumer credit bureaus on a regular basis to ensure there aren’t any errors or inaccuracies that are hurting your credit score. If there are, dispute them.
Factors that Go Into Personal Credit ScoresAlthough there are other types of personal credit scores, the FICO score is the most popular and commonly used personal credit score. The following factors are considered when your FICO score is calculated.
- Payment history: Payment history is the most important factor in your FICO score and accounts for 35% of it. It refers to whether you’ve made timely credit payments. Any time you miss a payment, it can have a negative effect on your credit score.
- Credit utilization: The amount of available credit you’ve borrowed is considered your credit utilization. You can find out your credit utilization by dividing your debt balances by your total credit limits on your credit lines. The rule of thumb is to try to keep your credit utilization to 30% or less of your available credit.
- Length of credit history: How long your credit accounts have been established is referred to as length of credit history. Typically, the longer your account has been open, the higher credit score you’ll have.
- New credit: New credit looks at how many credit accounts you’ve opened in a short amount of time. Since applying for and opening new credit in a short time frame can indicate you’re a risky borrower, only open new credit when necessary.
- Credit mix: The types of accounts that make up your credit report is credit mix. Mortgages, credit cards, and installment loans are all examples of accounts that may be included in your credit mix.
How Business Credit Scores are ImpactedIn some situations, your personal credit score will impact your business credit. For example, if your business is a sole proprietorship or single-member LLC with no employees, you can expect your personal credit and business credit to be connected. This is because you don’t have an Employer Identification Number so your business credit will be associated to your Social Security Number and in turn, your personal credit. While you can use your personal credit if you’re a sole proprietor, obtaining an Employer Identification Number is highly recommended. By doing so, you can avoid being held personally responsible if your business faces financial problems. In addition, if you decide to apply for a financial product for your business such as a credit card or small business loan, your personal credit will likely be evaluated to determine if you’ll qualify and how much credit you can receive. For instance, if you’re applying for an SBA loan, you’ll need a minimum personal credit score of 650. While you may get approved for an SBA loan with a lower credit score if you have other business measures in place, this isn’t very common. The major reason some lenders consider personal credit scores when determining whether to approve you for financing is because they believe that if you as the owner have a good personal credit score, your business is likely financially responsible. Due to this, lenders are more confident that you’ll be able to repay any money that you borrow. While your personal credit score and business credit score are separate, your personal credit does affect your ability to secure business credit products like business loans and credit cards. Therefore, it impacts how you can grow and improve your business credit.
How to Build Business CreditIf you’d like to build business credit and improve your chances of qualifying for business credit with low interest rates and favorable terms, follow these tips.
- Legally register your business: In order to build business credit, you must incorporate or form an LLC. Doing so will enable you to get an Employer Identification Number, which business credit reporting agencies will use to track your business credit.
- Obtain a business card and business bank account: Obtain a business credit card and bank account that you only use for business purposes. Then, focus on making timely payments and keeping a low credit utilization.
- Work with vendors who report payments: If possible, use vendors that will report your payments to the business credit bureaus. The good news is that many of them do so you shouldn’t have any trouble finding them.
- Keep a close eye on your business credit reports: Check your business credit reports at least a few times a year. Make sure to dispute errors or inaccuracies as soon as possible.