IMPROVE YOUR CREDIT
Credit Monitoring and Improving Your Credit
One of the most important aspects of small business ownership is understanding your business credit score and, your personal credit score also known as, “FICO score.” In many cases these scores tend to be misunderstood and mis-managed. Understanding the importance of these scores and how they are derived can help you better manage them which in turn will save you a great deal of money and headaches in the future.
Your personal FICO Score
When applying for any type of business credit from banks and other lenders they will first look at your FICO score and then look at the business credit score, in addition to how long you’ve been in business. Alternative lenders focus more on years in business and your businesses’ monthly cash flow however, your credit score may also be considered if either cash flow or years in business are below their set standards.
Banks and other lenders started using FICO score in 1989 in order to create a set standard when determining a borrower’s credit worthiness. Your FICO score is based on data that is collected by the 3 credit bureaus Equifax, Experian, And Transunion. They collect and report on your past payment and credit history, then rank it on a scale from 300 to 850. The formula is weighted as follow:
- 35% - Payment history, number of late payments, charge offs, liens, judgments and bankruptcies.
- 30% - Credit utilization - Outstanding credit balances as a percent of total credit extended.
- 15% - Length of credit history
- 10% - Type of credit is use (Mortgage, Auto, Line of credit, Credit cards)
- 10% - New credit applications (credit inquires)
This information is collected and used to derived your FICO score which is a large part of your personal credit file maintained by the 3 major credit bureaus. The file also includes your personal information such as name, address, date of birth and sometimes employment information.
Your Business Score
Your business credit history is linked to you by your Employer Identification Number (EIN) or Tax ID Number, which is how the government recognizes your business for tax purposes. You can apply for an EIN online and receive it almost instantly. Technically, if you’re a sole proprietor, you don’t need an EIN for taxes, but to establish business credit, you will. There are credit reporting services that only deal with businesses, with Dun & Bradstreet being one of the largest and best known. If you have more than one business, you can have a separate report for each, as long as it has its own EIN. The most important factors for scoring businesses are usually how you pay your bills, how much debt you carry, and what type of industry you’re in. Generally speaking, business credit scores have fewer variables than FICO scores, and it is easier to improve the score for a business than it is for an individual. Six steps to build business credit;
- Open a separate business checking account
- Apply for and use a business credit card
- Ask for credit terms from your vendor
- Apply for a small loan
- Register with the business credit bureaus
- Select the correct business structure
Final Thoughts
Your FICO score is the first thing that any lender for personal, business, auto, or mortgage loans will look at. By having a FICO score of 680 and above will likely increase their odds of getting approved and receiving better rates. Even if you are not in the market for a loan right now, having a high FICO will demonstrate to lenders your ability to manage credit and your business. Also, keep in mind having a good FICO score will affect you getting a job, renting an apartment or even receiving reduced insurance rates. Take time out of your busy schedule and begin to look at your credit file. Dispute any errors you detect with the 3 credit bureaus, or seek advice and help from a reputable credit repair agency.