3 Tips to Improve Your Business Credit

Today we’re diving into business credit. While it’s important to have good personal credit, it’s also imperative to have good business credit. Business credit is especially important when applying for a business loan or lease.

Business credit may be the deciding factor to receive top-notch rates, premiums, or payment terms. It can even determine whether or not you qualify for a loan or lease in the first place. Here are a few tips to ensure your business credit score reflects the potential of your growing business.

 

1. Maintain Records with All 3 Business Credit Bureaus

Unlike personal credit scores, which have a standard FICO calculation, business credit scores are determined differently by each credit bureau.

Lending companies may utilize a service such as PayNet which pulls business credit from a database of over 25 million small business loans to determine risk and future loan preference.

Additionally, you want to keep on top of your business credit records at Dun & Bradstreet, Experian, and Equifax credit bureaus. Make sure each has your accurate information. Each of these bureaus use a slightly different scoring model for business credit. While you won’t know which report a lender will choose to pull, you can keep track of your records. If your business pays its bills on time, you will improve your score over time.

Business credit scores are determined differently by each credit bureau.

Maintain your records by providing these credit bureaus with your updated information, such as a change in business address. By keeping up with all 3 credit bureaus, you ensure all records accurately reflect your company.

 

2. Make Your Payments ASAP

Your payment history is important to all three business credit bureaus, despite their unique individual score calculations. It’s important to pay these bills as soon as you’re able to. This will help positively impact your business credit score.

In fact, some scores even offer incentives to pay bills early. For example, you can only achieve a perfect 100 Paydex score by making your payments early. Your payments are also weighed by dollar amount – the higher the payment, the heavier its weight on your score. This means that a late payment on a high bill will affect your score more than an early payment on a low bill. So keep an eye on your due dates to ensure that your score remains optimal!

 Payments are weighed by dollar amount – the higher the payment, the heavier its weight on your score.

 

3. Open Tradeline Accounts

To calculate your score, business credit bureaus need to collect data on your payment history with vendors. This can include office supply stores, small business credit cards, and small business loans.

Though it takes time to establish, you’ll get a higher score with an extensive credit history showing on-time payments. Then your score will better reflect your ability to make timely payments on business bills. And this helps assure lenders that your business holds a low risk for funding. Higher scores can lead to lower interest rates and more convenient payment terms for you and your business.

Though it takes time to establish, an extensive credit history showing on-time payments increases your credit score.

While building business credit takes time and meticulous effort, the advantage is worth it. Your credit score reflects how well your business handles money, and there are plenty of benefits to be reaped!

 

5 Factors That Will Make or Break Your Personal Credit Score

When was the last time you checked your personal credit score? If you hesitate to answer, you’re not alone. 60% of American consumers have not checked their credit in the past 6 months, and 18% have never checked their credit scores. On average 24% check their credit “every few months.” according to Next Gen Personal Finance. And a much smaller percentage understand the number behind their credit score.

Of course we don’t blame them! Credit scores are multifaceted and can be complicated when you don’t understand the factors impacting the numbers. But we’re here to make the credit waters clearer. The Fair Issac Corp, or FICO, score is the most commonly used credit score, running from 300 to 850. Read on to understand the 5 categories FICO uses that will make or break your credit score.

 

1. Payment History

Payment history accounts for the most crucial part of your FICO score at 35% of your total score.

Why is it so important? Well, you wouldn’t visit a restaurant that had cases of food poisoning, would you? And you’re more likely to choose a 5-star barber over one who occasionally leaves his customers with bald spots, right? Your credit history functions very similarly.

Payment history accounts for the most crucial part of your FICO score at 35% of your total score.

Payment history shows how you’ve handled debt in the past and helps project how you’ll handle it in the future. This includes revolving trade lines, such as credit cards, as well as installments, such as an auto loan. It’s also important to know that your trade lines are all weighted differently. Defaulting on a larger loan (ie. mortgage payment or student loan) will hurt your credit score far more than a smaller default.

Making consistent, timely payments is one of the best ways to improve your credit score overall.

 

2. Amount of Debt

Your total outstanding debt is highly important when factoring in your FICO score. In fact, it accounts for 30% of your total score.

Your amount of debt is calculated similarly to your payment history as revolving and installment accounts are weighed differently. But when calculating your debt, revolving accounts weigh more. Revolving accounts allow you to borrow as much or as little as you want up to a limit (ie. credit cards).

Because revolving accounts do not have a predetermined amount, they are more risky.  Habitually maxing out credit cards or toeing the line of your limits indicates that your unable to responsibly handle your debt.

To score high in this category, keep your credit card balances low. It’s recommended to keep credit card spending contained under 25% of your credit limits.

It’s recommended to keep credit card spending contained under 25% of your credit limits.

 

3. Length of Credit History

If you’re new to credit, you’re not going to have a perfect credit score.

FICO looks at credit history to predict long-term financial behavior. The more history, the higher they can score you (assuming the other 4 categories are also positive).

FICO looks at credit history to predict long-term financial behavior. The more history, the higher they can score you.

Credit history makes up 15% of your total score. And the best way to improve that 15% is to start (or continue) building that history early! You can start building credit early by simply using a credit card and staying well below the limits.

 

4. New Credit

While on the subject of building credit, we want to caution that opening too many new accounts at once can actually harm your score.

New credit makes up 10% of your total score, as FICO analyzes how many new accounts you choose to open at a given time.

We suggest that you only take on new credit when it makes financial sense for you. Building credit the right way takes time, but it pays off in the long run, reflected in your credit score!

Only take on new credit when it makes financial sense for you.

 

5. Credit Mix

The final 10% of your FICO score is determined by your mix of revolving credit and installment loans.

Having a good mix of both types of credit shows that you can handle all kinds of credit. You are showing your monetary responsibility to lenders. When you have a great payment history across multiple trade lines, from credit cards to auto loans, you prove that you are less risky for lenders.

Having a good mix of both types of credit shows that you can handle all kinds of credit.

 

Action Steps

In closing, if you’re unsure what your credit score currently is, we highly suggest checking it. Knowing your number will be a huge asset to determine where you can grow. This way you can get the best rates for loans, rentals, and even financing for your business!

Be careful to check your credit sparingly. Too many hard credit pulls can decrease your credit score.

The FRCA (Fair Credit Reporting Act) allows individuals to pull their credit report once every 12 months to check for discrepancies, up-to-date information, and even check for identity theft. While this free service does not include the credit score itself, it includes helpful information and is the authorized site for all three major credit bureaus. It’s also considered a soft inquiry, minimally impacting your credit score.

Some banks offer to show your FICO score, and some bank apps have your score built in!

We hope you learned tips on how to improve your credit score. Check out our other blog resources to set your business up for success!

 

Could Recent Changes Really Increase My Credit Score by 30 Points?

In this blog post, we detail how your FICO score may jump 30 points if you had a tax lien or civil judgment on your credit report. But this has deeper implications affecting everyone trying to borrow funds. Read on to learn how.

 

Recent News Affecting Your Credit Score

In July of 2017, the National Consumer Assistance Plan (NCAP) called for the three major credit reporting agencies, Experian, Equifax and Transunion to remove most civil judgments and tax liens from their consumer reporting databases. You may ask, what does this actually mean?

Expert risk management services like LexisNexis predict that this change could raise FICO scores as much as 30 points for some consumers. For the 9-11% of US consumers with tax liens or civil judgments on their credit reports, the possibility of any score increase sounds great. And when it’s a 10-30 point bump, that can seem almost too great.

This change could raise FICO scores for consumers with tax liens or civil judgments.

 

Too good to be true?

LexisNexis is all about facts and figures. They’re the keeper of more data than all three credit bureaus combined. They provide risk management and computer-assisted legal research to businesses across the globe. They’ve been around for over 50 years and boasted the world’s largest legal and public-records database in 2006.

We asked, “Will removing tax liens and civil judgments from credit bureaus increase FICO scores by up to 30 points for some?” They detailed several variables to consider:

Many with weak credit and negatively impacted scores due to their tax liens or civil judgments will likely see an increase. This increase is more likely if the remainder of their credit is clean and without delinquencies.

If you have weak credit, there are ways to continue to improve your FICO score.

However, consumers with strong credit will likely see little or no increase to their scores. To learn how to increase your credit score for a report that lenders will love, check out the following blog: 5 Factors that Will Make or Break Your Personal Credit Score.

 

Lenders’ Opinions on these Changes:

This is where the hit comes for everyone. If you’ve been wondering, “I don’t have tax liens or judgments, why should I care?” Read on.

Mortgage and commercial lenders’ reactions are important because they affect everyone who is looking to borrow. Lenders use credit reports and FICO scores to determine creditworthiness. Most credit reports are divided into multiple areas. These include real estate, installment debt (auto, student loans, and credit lines) and unsecured debt (revolving credit cards).

Lenders use credit reports and FICO scores to determine creditworthiness.

Before July 2017, when lenders checked reports for creditworthiness, they would call the public records area the ‘red flag area’. This red flag area contained tax liens, civil judgments, and bankruptcies – the very items being taken out of question now. LexisNexis says that mortgage borrowers who have a judgment or tax lien are 5.5 times more likely to go into pre-foreclosure or foreclosure. Before July 2017, this red flag area helped confirm the borrower’s inability to pay back debt.

Now, the removal of this information decreases lenders’ ability to fully assess a borrower’s creditworthiness. In the future, to protect themselves from what they see as inevitable loss, lenders may increase interest rates for all borrowers.

In the future, to protect themselves from ‘inevitable loss’, lenders may increase interest rates for all.

This means that everyone will likely see an increase in rates. Even if you’ve never had a civil judgment, and even if your credit score remains flawless, you’re included. You will likely see a slight increase in consumer and commercial rates due to the overall increased risk to lenders.

 

The Good News

Credit experts saw this coming. Brian Riley, director of the Mercator Advisory Group, predicts that mortgage and commercial lenders will turn to additional due diligence.

Last May, LexisNexis announced that they were already prepping a new report to address this point of concern. Amerifund and other commercial finance institutions have been using additional due diligence information sources for years.

This is why it’s important to cover all of your bases when starting a business and planning for business credit. Ensuring you have the correct business structure and legal documents prior to applying for a business loan can save you on rate, time, and stress when you need it most.

Having the correct business structure and legal documents prior to applying for a loan can save you on rate, time, & stress when you need it most.

Plan for success with our free Comprehensive Business Start-Up Checklist below. We hope this saves you time and stress by feeling more prepared. And as always, feel free to reach out to us with any questions you may have.