What Every Small Business Owner Needs to Know About Personal Credit

In the world of business, personal credit is a powerful tool that can help you succeed. But how do small businesses know what they need to know about their own credit-building potential? Join this blog as we explore some common mistakes entrepreneurs make with personal finance and why it’s important for all business owners to take charge of their financial lives.

The “how high does credit score go” is a question that many small business owners may not know the answer to. The answer is 100, which means no one can have a higher credit score than you.

What Every Small Business Owner Needs to Know About Personal Credit

When it comes to getting a company loan, a solid personal credit score is critical for almost every small business owner in the United States. While it may seem counterintuitive to discuss your personal credit score while discussing a company credit requirement, a poor personal credit score has been the downfall of many small business loan applications.

Lenders look at your personal credit history to assess your creditworthiness and willingness to satisfy financial commitments in the past. Making steps to enhance your credit score might lead to more alternatives, better terms, greater acceptance rates, and cheaper interest rates if you have a less-than-perfect credit score.

Do you know what your credit score is?

You should if you don’t already. Furthermore, Experian, Equifax, and Transunion, the three main personal credit agencies, make it simple to get your credit score. They’ll also monitor your personal credit report for a little cost and tell you if anything new is added or a change occurs.

Annualcreditreport.com is one source where you can get your credit report for free once a year, but there are hundreds of others—many of which also provide low-cost credit monitoring.

Editor’s note: While Annualcreditreport.com offers free credit reports, they don’t contain your credit score, which you’ll have to pay for separately.

The following is a breakdown of how your score is calculated:

The personal credit score we use today was first launched in 1989, and it combines data gathered by credit bureaus into a standard score ranging from 300 to 850. (the higher the number, the better the score). The formula for determining the score is easy to understand:

  • Late payments, bankruptcies, judgements, settlements, charge-offs, repossessions, and liens will all lower your score by 35 percent.
  • The debt-to-credit-limit ratio, the number of accounts with balances, the amount due across various kinds of accounts, and the amount paid down on installment loans are all particular measures.
  • 15 percent Credit History: The average age of the accounts on your report and the age of the oldest account are the two most important criteria. The longer (or older) the file, the better, since your personal credit score is attempting to forecast future creditworthiness based on previous performance.
  • 10% Credit Type Used: If you can show your ability to handle various forms of credit, such as revolving, installment, and mortgage credit, your credit score will improve.
  • 10% New Credit: Each “hard” inquiry on your credit report has the potential to lower your score by 10%. While shopping for mortgage, vehicle, or student loan rates is unlikely to harm your credit score, applying for credit cards or other revolving loans may. According to Experian, these queries will likely be on your record for a few years but will have no impact on your credit score after the first year.

Tips on how to raise your score

There are no quick fixes for a poor grade. A concentrated effort over six months to a year may, however, result in a significant improvement in a less-than-perfect score. Alternatively, skipping one or two payments may dramatically lower your credit score in a short amount of time. Here are some ideas to assist you improve a low score: 

1. Make timely payments. While it may seem apparent, making regular payments on your credit accounts is the single most important thing you can do to enhance your score. The timely payment of your mortgage, vehicle loans, credit card payments, or other personal debt accounts for 35% of your credit score. Nothing will have a bigger influence on your credit score than this.

2. Don’t apply for credit you don’t need—Because credit inquiries may lower your score, applying for credit you don’t need might make it more difficult to improve your credit score.

3. Don’t attempt to shuffle your credit accounts—Transferring amounts from one credit account to another is a blatant ploy that may potentially damage your credit score.

4. Use credit wisely—This may be an oversimplification, but it’s critical to resist the urge to use all of your available credit. If you want to raise your credit score, limiting your credit utilization to roughly 15% of your authorized credit limit.

Keep in mind that there are no shortcuts. There isn’t a fast repair for a negative credit score, so be wary of anybody who claims to have one.

Any lender considering you and your firm for a small business loan will almost certainly consider your personal credit score. Protect it as though it were a valuable corporate asset.

Have you managed to repair your credit? In the comments section below, tell us about your credit repair experience. 

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Frequently Asked Questions

Do small business loans check personal credit?

A: Yes, small business loans require that the borrower have a personal credit score of at least 600.

How much credit should a small business have?

A: A small business should have a credit rating of at least 1.5%

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