5 Credit Score Tips for Small Business Owners
Few constituents of the American economy rely on their credit scores more than small business owners. Having good credit is often imperative to funding a small business, especially in the early start-up days. Small business loans, business credit cards and charge cards all require credit checks, and in order to get approved for the best interest rates (and even to get approved at all), a good credit score is required.
And yet, like most average consumers, many business owners are unclear on what exactly goes in to calculating their credit score. For those small business owners in the dark when it comes to their credit scores and - most importantly - how to improve them, here's 5 credit score tips to consider:
1.) Try not to carry more than one balance on your credit cards
Carry multiple balances on multiple credit cards in't the worst thing you can do to your credit score (we'll get to that later), but it could tip off potential creditors that you're credit-dependent and could have an adverse effect on your credit score. Not only that, carrying multiple balances means you're paying interest on multiple balances, too. Obviously, that's not going to help your small business's bottom line.
If you can help it, relegate your credit card balance to just one card and keep it a clean slate with your other open, good-standing credit accounts. As for just how much of a balance you should carry...
2.) Keep the amounts you owe on your credit cards as low as possible
Carrying a balance won't immediately hurt your score, and widely-used credit scoring models like FICO have even gone so far as to say that carrying a small balance might even improve your score. It's when that balance gets too high is when it becomes a problem.
Most financial experts will tell you that keeping the amounts you owe each month below 30 percent of your total available credit (all your credit lines combined) will keep your score steady, but getting under 10 percent is probably ideal. That's because the amounts you owe make up nearly a third of what FICO takes into account when calculating your score, which means keeping a low balance is crucial to maintaining a solid score.
That said, there's another factor that plays an even bigger role when determining your FICO score ...
3.) Never (EVER) miss a credit card or loan payment
The number one determinant of your score according to FICO is your payments history. Essentially, every time you make a payment, you're improving or at the very least maintaining your credit score. A sterling payment history is crucial to your credit score, and even just one derogatory or delinquent payment can work to plummet your score and your company's chances of getting approved for the best possible loan rates moving forward.
This is something that the general population has taken note of lately. According to NPR's "Marketplace", late payments on credit cards are at "historic lows". More and more, consumers and small business owners alike are aware of the value of maintaining a good credit score. That means prioritizing loan and credit card payments each month, and paying down those existing balances as quick as you can.
4.) Maintaining old accounts
Long after the bonus points offer has expired and the intro period runs out, old credit cards remain useful to consumers and business owners alike. That's because the average age of your accounts is yet another factor lenders account for when sizing up you and your company's lending risk. The older your accounts, the longer it shows you're an active and responsible user of credit. FICO uses this when calculating your score, and the general rule is that the older the age of your accounts on average, the better.
Rather than close out old accounts, keep your cards open, use them sparingly, and pay off the balance each month to maintain an excellent credit score.
Finally...
5.) Don't apply for several lines of credit in a short period of time
Earlier we mentioned that it's important not to appear "credit dependent" to lenders, and this credit score tip falls right in line with that concept.
Applying for multiple lines of credit in a short period of time tips off lenders that you may be in serious need of credit, and that you may be more of a credit risk than you would prefer to lead on. Not only that, hard inquiries remain on your credit report for two years, and can have a small but noticeable negative effect on your score for at least 12 months. A hard inquiry is the one taken of your report by possible lenders, and it hurts your score a little bit each time so as to deter consumers and business owners from applying for credit often.
That said, if you're shopping for a good rate, credit scoring models will take note and only deduct one inquiry from your score if you apply to a small handful of credit lines within a week or two.
Remember, without a decent credit score, you might not qualify for the loans and interest rates your company needs to grow. The above steps aren't the only things you can do to improve your credit score, but they're certainly an excellent place to begin.
