5 Easy Ways To Improve Your Credit Score And Help Your Business
May 14, 2019
5 minutes to read
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With the The expanding US economy, Relatively inexpensive credit and low corporate tax rates encourage capital investment, now is a great time for small business owners to take out debt to finance their growth.
However, small business owners can dramatically improve their chances of getting a loan approved by first taking steps to increase their personal credit score.
The most important factors a bank looks at in deciding whether to approve a loan are the 5 Cs of credit: principal, collateral, terms, cash flow, and creditworthiness. For start-ups, solo consultants and start-ups startups, this solvency component relies heavily on the personal credit.
Thus, by making sure that your personal credit score is as high as possible, the business will have the best chance of approving an application for a loan backed by the US Small Business Administration.
Understanding Your Credit Score
The first thing to note is that the FICO scores national credit bureaus – Equifax, Experian, and TransUnion – use a different method than the banks. For example, Experian uses a FICO 8 score, a different methodology from that used by FICO 5 score banks. FICO 8 scores creditworthiness on a scale of 300 to 850 while FICO 5 scores 334 to 818.
FICO 5 scores are weighted at 35% for payment history, 30% for the amount of available credit used and 15% for the length of credit history, with the credit mix and new credit requests each weighted at 10% . Typically, small business lenders want to see scores above 680 to consider an applicant. However, business owners with borderline credit scores can take smart steps to increase their score by 50 points or more.
1. Establish a good payment history
It starts with allowing loans to “season”, in bankers jargon. Bankers like to see loans such as mortgages in place for several years. It’s okay to refinance a mortgage every few years, but doing it every year makes a house feel like an ATM and hurts a credit score. A quick way to improve a score is to pay bills on the 11th.e of the month, four days before the credit bureaus report unpaid debts. Paying credit card and loan repayments on the 11the gives time for these payments to be cleared before the 15the, which means that credit scores will reflect both on-time payments and less credit usage – a double boost. Making this change could, for example, improve a credit score from 650 to 710.
2. Manage credit use wisely
Banks like to see that over 70% of credit capacity is available. People using 50% or more of available credit are considered marginal, while those with 30% or less of their available credit are considered low credit risk. For someone with $ 10,000 credit availability, it makes a huge difference whether they have $ 7,000 in debt or pay it off at $ 3,000. This lower balance can often be achieved as easily as paying a credit card statement a few days earlier than usual.
3. Keep credit accounts open
People often make the mistake of paying off a credit card to reduce their debt and then closing the account. Paying off the card might improve a score by 8 points, but closing the account reduces the amount of available credit, which could reduce a score by 20 points.
4. Types of debt matter
When it comes to credit composition, banks prefer secured debts such as mortgages, but having a mix of debts, ranging from one mortgage to one. Home equity line of credit and credit cards help.
All credit bureaus are required to provide consumers with a free report each year. Business owners should therefore request a report from an office every four months to stay on top of any issues that may arise.
5. Correct imperfections
Nowadays, with the outsourcing of physician billing, insurance-related collections are a major source of nuisance on credit reports that can often be fixed with a few phone calls or by making certain payments for unpaid charges and unpaid. By checking the reports, consumers can also find errors and dispute them.
Consumers often find accounts that have been written off, perhaps when interest charges have accrued after an account is closed. Credit repair attorneys can resolve these errors by writing to creditors asking for evidence of non-payment after an account closure request or by removing the report from their office report. Such action can clean up a credit score in a matter of months.
Not all problems can be solved, but most banks will ignore old medical collections, especially if they stem from a single problem, for example, a bankruptcy more than 10 years old that no longer appears in the reports of the medical professionals. offices.
When determining how much a small business owner can repay each month, the type of debt a person carries is also important. For example, for $ 10,000 in credit card debt, most banks estimate a minimum monthly payment of 5%, or $ 500, compared to a home equity payment of around $ 46 / month, or a 5 year unsecured term loan with estimated payment of $ 212. /month.
A investigation conducted by regional Federal Reserve banks finds that securing a loan is the # 1 challenge facing small businesses. This problem is particularly acute for small businesses with sales of less than $ 1 million. Of these businesses, 55% are denied a loan, so improving personal credit scores is essential. And it’s easier than a lot of people think.