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Understanding Credit Scores

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As a business owner, you will need to understand and manage both your PERSONAL and  BUSINESS credit scores. Major credit bureaus Equifax and Experian track both business and personal credit activity.

Reporting from creditors, lenders, and other companies helps them build an accurate representation of your credit worthiness. The information reflected on your credit report is then filtered through a scoring model to create your credit score.

On this page we provide information that will help you understand what’s behind credit history and what can be done to improve it.

Personal Credit

We’ll start first by covering personal credit. If you’re a startup, this is your primary form of credit history and it will be a factor when seeking funding. The main factor considered will be your FICO credit score. To better understand your FICO score,  watch the short video below.

Understanding what moves your FICO score up and down is important, both for building and repairing your credit. The things that matter most in credit scoring are payment history, credit utilization, and to a lesser extent credit mix, credit inquiry frequency and length (time) of credit record.

Payment history. The biggest chunk of your credit score is determined by how well you pay your bills each month. In fact, payment history accounts for 35%  of your credit score! You’ll see this history listed on your credit reports through different credit accounts you’ve had over the last seven years.

Under every loan, credit card, or mortgage you’ve had, you’ll see how much you’ve paid each month for an extended period of time. You’ll also see your total balance. Other creditors like cell phone carriers or utility companies can report  late payments, but they typically don’t report payments that are made on time.

If you do have a late payment listed, it’ll be marked with exactly how late it was. This can range from 30 days to 150 days (or more if the account went into default). So naturally, the later the payment, the more your credit score will drop as a result.

Credit utilization. This term describes how much of your credit limits you are using. Thirty percent (30%) of your FICO score relates to how much debt you owe. Installment loans like a mortgage or student loan aren’t weighed as heavily as revolving debt like credit cards. Lenders look at your debt-to-credit ratio, or credit utilization. It basically shows how much you owe compared to your maximum line of credit on your credit cards.

If you’re close to being maxed out, your credit suffers. Since it’s a ratio, two people with the same credit card balances could have different credit scores if one has higher credit limits.

For example, a person with $3,000 charged on a credit card with a $10,000 credit limit only has a 30% debt-to-credit ratio. But someone else with $3,000 charged on a credit card with just a $5,000 credit limit would have a 60% ratio and — all other things being equal — a much lower credit score.

Credit mix:  The next 10% of your credit score is determined by the types of credit you have. Revolving credit like credit cards or retail cards hurt your credit score more than installment debt. Installment loans have some sort of asset tied to them, like a house or a car. You are more likely to repay these loans than unknown purchases from a credit card since you own something of value.

Student loans are also viewed more favorably than credit cards because they indicate an investment in your future earning power. They figure the more money you make, the faster you can pay off your loans!

Credit inquiry frequency: This factor makes up 10% of your score as well. Each application for new credit in the past 2 years, a hard inquiry on your credit report, may result in a temporary dip in your score. This is unless you’ve made multiple credit inquiries for the same product within a few weeks which is treated as a single inquiry.

Length of credit record:  This makes up the final 15% of your credit score. Lenders can’t gauge your ability or willingness to repay a loan if you have a limited credit history. The FICO credit scoring model considers how long your various credit accounts have been open, including loans and credit cards.

Unfortunately, rent payments aren’t included in the FICO score. However, there are rental reporting services that you could use as additional documentation in your credit application.

Managing your credit is important  and in some cases, it may need some repair work. You may need to establish new patterns of payment, dispute some adverse statements in your credit history or perhaps petition to have negative events that have been resolved cleared from your record. To learn more about credit repair here.

Small Business Credit

Many small business owners don’t realize that business credit scores are distinctly separate from personal credit scores. Your business credit score, which is expressed on a “risk scale” from 1 to 100, has no impact on your personal credit score, and vice versa.

Business credit reflects your company’s image to potential lenders and business partners. Yet, unlike personal credit — which can be viewed only with the permission of the report holder — business credit scores are made available to the public, including suppliers, investors and lenders. And as a small business owner, you know that credit will impact your ability to obtain capital to support your future plans.

Your business credit report can influence:

  • The amount of your loan and what interest rates you’ll pay
  • Your business insurance premiums
  • Whether suppliers will extend credit terms

Establishing and managing business credit is not complex but it does require that you put structure in place to report and track it. Here are steps you can take.

1. Register your business and get an EIN.

For new business owners, the first step to establishing business credit is to register your business.

This process will vary depending on your business structure and where you live. Some states do not require sole proprietors to register if you operate under your own name (though you may still need a local business license). If you start an LLC, you’ll most likely need to register your business.

Make sure you also apply for an EIN, or employer identification number, with the IRS. This business tax ID is required by the IRS for many businesses — and it may be necessary for taking other important steps, like opening a business bank account.

2.  Check your business credit score

There are three primary business credit bureaus: Experian, Equifax and Dun & Bradstreet. Getting a business credit score from Dun & Bradstreet requires you to first apply for a DUNS number. You can do this for free on Dun & Bradstreet’s website. There’s no need to apply for business credit with Experian and Equifax, though. Those companies start credit files for your company on their own based on borrowing information from lenders that report to these bureaus. They also pull in information from public records, like court filings.

3. Open a business credit card

Because issuers use your personal credit to determine approval, you can get a business credit card without an established business credit profile. Opening a business credit card early can help you start building credit sooner, which means you’ll have a longer credit history — and potentially a stronger score — in the future.

Most small-business cards report activity to business credit bureaus, so on-time payments and low credit utilization (less than 30% of your available credit) will help build your business credit score. On the other hand, missed payments and delinquencies often negatively impact your business and personal credit scores.

4. Pay creditors on time — and early if possible

Payment history is the most important factor in determining your business credit score. Paying credit obligations on time is critical. Some business credit scores, such as D&B’s PAYDEX Score, are based entirely on your company’s payment history.

5. Establish trade lines with your suppliers

Suppliers often extend trade credit, which allows you to pay several days or weeks after you receive the inventory. This type of accounts-payable relationship can boost your business credit score, provided your supplier reports payments to a business credit bureau.

You can set up trade lines with any small vendor, such as your water or office supplies distributor. If those vendors don’t report to a credit bureau, you can list them as a trade reference on your account, and Dun & Bradstreet will follow up to collect your trade data.

6. Choose lenders that report to business credit bureaus

Small-business loans can boost your business credit if you make all your payments on time, but not all lenders report to business credit bureaus.

If you’re taking out a business bank loan or an online business loan, your lender most likely reports your payment history. Merchant cash advance companies typically don’t.

If you need a loan, ask potential lenders whether they report data to business credit bureaus. Weigh their response against other factors of their offer, like interest rate, to find the right fit.

7. Keep your information current with all three business credit bureaus

Each major credit reporting agency maintains files on millions of consumers or businesses in the U.S. The sheer volume of data that creditors and credit bureaus exchange means there’s a lot of room for error. Business identity theft can exacerbate the problem.

Check your business credit score with all three main business credit bureaus: Dun & Bradstreet, Equifax and Experian. Then, ensure all trade lines are accounted for and report any errors — whether they’re to your address or incorrect negative marks — to the respective business credit bureau.

To investigate and learn more about business credit history, visit one of the providers below.

Dun & Bradstreet

Equifax

Experian

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