When you approach a lender about applying for a loan for your small business, you want to have all of your necessary information and documentation in place before you start the application process. But sometimes, business owners overlook a critical piece of the loan approval process: their own personal credit score. Even if a lender is impressed with all or most of the other criteria for the loan, they might shut down the whole loan process if your personal credit score isn’t good enough. Next step? Repair your personal credit.
It’s a fact that most lending institutions will consider your personal credit score when determining your creditworthiness for a business loan. Traditional lenders, such as banks and credit unions, require a higher personal score higher than other lenders do but charge lower rates. Conversely, nontraditional lenders typically take more risks than the traditional ones, and they will usually charge higher rates and require less collateral. Having a good personal credit score applies to new business owners that have just begun operations as well as seasoned business owners who have been around for a while.
Why is Your Personal Credit Score Considered for a Business Loan?
The reason lenders put so much weight into a personal credit score is because it is an indication of how you treat your own personal credit obligations. A business owner might not feel that the two financial responsibilities (business and personal) have anything to do with each other, but lenders give a personal credit score considerable attention when deciding your business creditworthiness. Therefore, if you are looking for a business loan and you consider your personal credit score less than stellar, you’ll want to repair your personal credit.
What Personal Credit Score Is Required for a Business Loan?
Business.org says that a ‘poor’ credit personal credit score is from 600 to 649, and a ‘bad’ credit score is anything under 600. They go on to say that a business owner needs their personal credit score needs to be at least 600 to get any kind of business loan. They also state that even though there are several sites that will give you a free credit score, the score used by most lenders is the FICO score (an industry-accepted score calculated by a data analytics company who provides credit scoring services) and must come from the three major credit reporting bureaus: Equifax, Experian, and TransUnion.
How Do You Repair Your Personal Credit Score?
If your personal credit score is too low to get a business loan, you’ll want to repair and raise that credit score. There are additional benefits with raising your credit score including more favorable rates and terms on loans and credit cards. But how do you go about fixing your credit score?
- Check your credit score! – You must know what your true credit score is in order to fix it, so you should check with one of the three major credit bureaus mentioned earlier. The credit report they supply you will show if there are any erroneous issues that can be corrected. If you contest a charge from a company, they have a limited amount of time to respond with proof that you did something to deserve the credit blemish. But if that company does not respond, the credit reporting bureau is required to erase that blemish from your record. A report from one of these agencies will also alert you to someone fraudulently using your personal information to have their own credit cards or accounts under your name. Ideally, you should monitor your personal credit score often.
- Make Timely Payments to Creditors – This is one of the most important things you can do to keep a good personal credit score. Make your payments on time! Experian reports that “your payment history accounts for 35% of your FICO score”. Lenders want to feel confident that can and will pay down your debt on time, so they’ll look at your payment history. It’s important not to miss one payment, as this can lower your credit score. If for some reason you do actually making a late payment to a credit card or some other institution, call them and explain that this sort of thing is unusual for you and you’ll never do it again. Then ask them to please don’t charge you a fee and don’t report it to the credit agencies. As long as you don’t do this with any consistency, they will very likely not charge you or report the late payment.
- Utilize Your Credit – Creditors like to see a good ‘credit utilization ratio’. This is calculated by dividing your current total revolving credit by the total of all your revolving credit available. This gives them a peek into how to utilize your credit, and if that ratio is over 30%, you need to lower it. The credit utilization ratio accounts for 30% of your focus your FICO® Score.
- Open New Credit Cards to Increase Your Credit Limit – When you increase your credit limit without increasing the credit debt, this lowers your credit utilization ratio which is good for your credit score. For example, if you have spent $3100 on credit cards and he had a total of $10,000 available credit, you are slightly above the 30% credit utilization ratio (3100÷10,000 = 31%). If you open a new credit card with available credit of $1000 without any more charges, this will increase your available credit and bump you below the 30% credit utilization ratio (3100÷11,000 = 28%). But be careful you don’t open to the accounts as this can hurt your credit score.
- Length of Credit History – A longer credit history translates to higher credit scores. The amount of time you have on credit cards is responsible for up to 15% of FICO® Score. So before you get angry at a credit card company and cut up the card, think twice about how long you had that card. If it’s your oldest card, you may want to hang on to it.
- Have a Diverse Group of Credit Accounts – You don’t want to only own credit card debt. If you buy a car, set up a loan with a lender. Make payments on your student loan. Continue making your monthly mortgage or rent payments. All these types of credit are good for your credit score. The mix of your credit accounts makes up 10% of your FICO® Score.
- Start Paying Down Your Credit Card Debt – First of all, pay more than your minimum payment. When you start paying down your credit card, you’ll want to pay down the card with the highest APR (annual percentage rate). Also, if you have a card with a smaller amount on it, it looks good if you pay that off have a zero balance on one of your cards.
Follow these rules, and your personal credit score will surely begin to rise. It may take a little while, but when you need a business loan for your small business, having a good personal credit score will play a major part in whether or not your business gets that loan.
If your small business has had trouble getting a loan, contact one of our loan experts Affinity beyond Capital today by calling 833-234-6489.