The Importance of Personal Credit for Business Funding
For every small business owner in the U.S., a good personal credit score is crucial when seeking a business loan. Despite it seeming counter-intuitive to discuss personal credit when addressing a business credit need, a low personal score has been responsible for many rejected loan applications.
Lenders view your personal credit history as an indication of your past credit performance and your commitment to meeting financial obligations. Improving your credit score can lead to more options, better terms, higher approval rates, and lower interest rates.
Understanding Personal Credit
For most small business owners, personal credit history is a factor in every conversation about business creditworthiness. However, many don’t appreciate the significance of building and maintaining a credit profile that makes borrowing easier and offers financing options.
Here are key areas affected by personal credit:
1. Securing business financing
Lenders always consider personal credit score to determine creditworthiness, even if you have established business credit. A good personal credit score increases your chances of securing a business loan or other forms of credit.
2. Interest rates and terms
Personal credit score can also affect the terms of your business loan. A higher credit score typically results in lower interest rates, saving you money over the life of the loan.
3. Vendor relationships
Some suppliers and vendors check personal credit scores before extending trade credit. Good personal credit can help negotiate better payment terms.
4. Building business credit
Establishing a strong personal credit history helps build business credit. This enables you to secure larger business loans without personal guarantees.
5. Insurance premiums
Insurance companies may check your credit score to determine business premiums. A better credit score can lead to lower insurance costs.
6. Personal liability
If your business is a sole proprietorship or a partnership, negative impact on business credit can affect personal credit.
7. Business credit cards
Many business credit cards require a personal guarantee and issuers check personal credit. A good personal credit score qualifies you for cards with better rewards and lower interest rates.
How is Personal Credit Determined?
Most credit reporting agencies base their scores on the FICO score. Although scores may vary slightly, the calculation formula is similar. FICO measures your score based on these five data points:
1. Payment history (35%)
Timely credit obligations impact your credit score the most. Meeting mortgage, auto, and credit card payments on time is the most powerful way to build or strengthen your score.
2. Amount owed (30%)
Credit utilization, or the percentage of credit used compared to available credit, influences your score. Keeping utilization below 30% has a positive impact.
3. Length of credit history (15%)
Lenders prefer a longer credit history to assess future behavior. Maintaining older credit cards helps build a strong personal credit score, even if they are seldom used.
4. Credit mix (10%)
Creditors favor a mix of credit on your report. Having different types of credit, such as a mortgage, auto loan, and credit card, has a positive impact.
5. New credit inquiries (10%)
Applying for new credit slightly impacts your credit score. Be cautious, but don’t let it prevent you from applying for necessary credit.
What is a Good Personal Credit Score?
Although rankings may differ among credit agencies, most consider personal credit scores as follows:
Very Good:
– Long credit history with no late payments or collections, qualifying for the lowest rates with the best lenders (i.e., 750-800).
– A shorter credit history without late payments or collections, still qualifying for low-interest rates with good lenders.
Good:
– No recent late payments or collections, qualifying for good lenders at slightly higher rates.
Fair:
– Some recent late payments or collections, but currently in good standing. May exclude some bank loans but eligible for decent rates from alternative lenders.
Bad:
– Late payments and accounts struggling with collections. May qualify for a Merchant Cash Advance or Cash Flow Loan at higher rates.
Very Bad:
– Middle of collections with frequent past trouble. May qualify for a Merchant Cash Advance or Cash Flow Loan, but at high rates.
6 Tips to Improve Your Personal Credit Score
Whether you’re seeking a small business loan, auto loan, or mortgage, lenders assess your ability to service debt and make periodic payments. These tips, based on credit best practices, can lead to a better credit score:
1. Know your score
Regularly monitor your personal credit score. Increasing attention positively influences improvement. Several services, such as Experian and Nav, offer credit monitoring for free or for a small fee.
2. Use credit wisely
Avoid accessing all available credit simply because you can. Aim to keep credit utilization below 30%. Conscious credit card usage can impact your ratio and lead to a higher score.
3. Don’t jump around
Transferring balances between credit cards won’t improve your score and is considered a transparent gimmick that could hurt it.
4. Don’t apply for unnecessary credit
Unneeded credit applications can harm your credit score due to inquiries.
5. Make timely payments
Timely payments are the most crucial aspect of credit score improvement. Set up automatic payments to avoid late mortgage or auto payments.
6. No quick fixes or shortcuts
Improving your credit score requires patience and adherence to good credit practices. Over time, consistency pays off.
Knowing Your Personal Credit Score
It is crucial to know your personal credit score. The major credit bureaus, such as Experian, Equifax, and Transunion, make it easy to access your score. Websites like Annualcreditreport.com offer free credit reports once a year, but scores require payment. Protect your personal credit score as a valuable business asset.
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Hello!
I’m Andrew Brooks, a seasoned finance consultant from the USA and the mind behind phonenumber247.com.
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