Today we feature guest writer Jason O’Brien from SMB Compass who will be explaining how to keep credit scores up, with emphasis on small businesses. Thank you Jason for your time and keep up the good work on your endeavors!
If you’re a small business owner seeking financing, your credit score will play a big role in the loan application process. In fact, it’s one of the first things that banks, alternative lenders, and credit unions look at when evaluating your company’s qualification. Although some lenders will allow you to borrow money with a less than ideal credit score, maintaining a good credit standing increases your chances for being approved and receiving better loan terms from lenders.
What is a Good Credit Score?
Credit scores are three-digit numbers generated by the credit bureaus (Experian, Equifax, and TransUnion) that reflect an individual’s or business’s creditworthiness. Banks, lenders, and other organizations that offer things like mortgages, credit cards without a personal guarantee, apartment or car leases, etc. will use credit scores to measure the risk of lending or leasing to you.
A credit score typically ranges from 300 to 850. According to Experian, a score of 670 or higher constitutes a good credit score, while a score of 800 and above is exceptional. If a borrower has a good credit score, they’re considered low-risk borrowers. Those with a credit score lower than what’s viewed as a good credit rating may be considered “subprime” borrowers, which means they could have difficulty receiving better loan terms.
There are multiple factors that can contribute to your credit score. We’ve gone ahead and compiled those for you here:
Ways to Maintain a Good Credit Score
Maintaining a good credit score comes with a lot of perks. Aside from easily qualifying for loans, a good credit rating also typically translates to better terms on those loans, like lower interest rates. If you’re looking to improve your credit score, and maintain it once you have, here are five ways to do just that:
1. Don’t Miss a Payment Deadline
Missing a payment deadline is one of the most common and damaging factors affecting your credit score. According to Marketwatch.com, even a single missed payment can lead to a whopping 180-point decrease in your credit score. This may seem like a no-brainer, but when you’re running your own business and managing multiples projects at once, things can slip through the cracks. One way to avoid missing payments is to set a reminder for yourself to pay your bills on time. You can
easily use the calendar on your phone to remind you to pay your bills days before their deadlines.
Automating payments by using tools like Quickbooks can also help. All you have to do is input the information into the software and schedule a recurring payment to lenders and suppliers.
2. Check Your Credit Report
Even if you are paying your bills on time, errors and mistakes can still occur on your credit reports. When these are left unaddressed, it could lead to a drop in your score. You should get in the habit of checking your credit report every so often. You can quickly get a copy of your credit report in one of the credit bureaus.
Whenever you’re paying bills, be sure to keep a record of those payments. When checking your credit report, be sure that all your payments are accounted for. If you see some discrepancies, call the bureau immediately to fix the problem. Checking your reports lets you spot issues and address them sooner so your credit score isn’t affected.
3. Keep Your Credit Utilization Rate Low
The credit utilization rate (CUR) is the second most crucial factor that affects your credit score. Credit utilization is simply the ratio between your credit card balances and credit card limit. It measures the available credit you have. The lower your credit utilization rate is, the higher your credit score will be. Ideally, you want to maintain your CUR below 30% to maintain a good credit score. Let’s say you have a $10,000 credit limit. This means your debts shouldn’t go over or amount to $3,000. A high credit utilization rate reflects that you aren’t good at managing your credit – that you over use it or aren’t able to pay it back which makes you a less desirable loan recipient.
One easy way to reduce your CUR is paying your balances earlier than the due date, if able. You can also opt to open another card to increase your overall credit limit, given that you’ll be mindful of your spending and can pay off existing balances.
4. Don’t Close Old Accounts
Even if you’ve paid off some of your credit cards, it’s a good practice to leave those accounts open. Think about it, you still have the credit limit but you are using 0% of it. This means your CUR will be 0% which is the lowest it can be. This will help to improve your credit score. You’ll just have to keep the cards active by making small purchases here and there that you can easily repay. Another reason this can help to improve your credit standing is because the length of your credit history comprises 15% of your credit score. The longer you’ve had that credit, the better it will be for your score.
However, one exception to this rule is credit cards with a high annual fee. If you’ve paid those off, it’s best to close those accounts so you’re not stuck continually paying the high fees.
5. Limit Credit Applications
Having too many credit applications can also affect your credit score. Applying for multiple credits from different providers poses a greater risk than when you’re shopping for a single loan. These hard inquiries will reflect on your credit report, which will affect your credit score.
Typically, an additional hard inquiry will result in a 5-point deduction on your credit score. As much as possible, only apply for credit when necessary.
Maintaining a good credit score is one way to secure both your personal and business’ financial future. With a good one, you will have better chances of getting approved for personal or business loans and even qualify for business credit cards without personal guarantees. The key is to understand what a credit score is, how it works, and the factors that can affect it. Once you have that information, you can start planning on building your credit rating and keeping it at a good range.
There are virtually many things you can do to maintain or improve your credit score, but the items mentioned above are among the best ways to get you started.