Without good personal credit, it is very difficult to establish good business credit. Why? Because until your business becomes established, lenders will look closely at your personal character and trustworthiness before extending credit to your new company. You need to think about getting your personal credit in tip-top condition even before starting your business.
As a new business owner, you’ll be asked to sign a personal guarantee on almost any and every type of credit, whether it’s a bank loan, an equipment lease or a credit card. If you lack decent personal credit, your guarantee won’t be worth the paper it’s written on. The value of your guarantee is only as good as your personal credit history.
As a first step, business owners should examine their personal credit report at least once a year. Better still, examine it once a quarter. You can get your credit score and credit report from Experian,Transunion, or Equifax. Reports from these three credit bureaus typically contain similar information, but in different formats. You can also purchase 3-in-1 credit reports with combined information.
It typically costs $20-$25 to view your credit report online. Some services will mail you a copy of your credit report for free. But it’s a good idea to pay for online viewing because you will also be able to dispute any inaccuracies quickly and easily online.
If you find incorrect information, gather your proof and dispute the entry. If there are credit cards or services you thought you canceled, you’ll need to contact the entity on your credit report and get the information corrected to show the cancellation. It’s critical to contact all involved agencies in order to correct mistakes on your credit report.
Keep in mind that your personal credit scores do not reflect your income, age, education, or job title. They indicate how you use credit that’s extended to you. If you are establishing personal credit for the first time, opening key accounts and following a strict set of guidelines for maintaining those accounts will help you build your credit.
If you’ve already established a negative credit history, don’t despair. There are several things you can do to raise your rating and add as much as 100 points to a low credit score. It’s so easy that you can do it without using a pricey credit-repair business.
FICO scores are the credit scores most lenders use to determine your credit risk. They typically range between 520 and 800. You have three FICO scores, one for each of the three credit bureaus. Lenders typically look at all three FICO scores and take the average score. Your three FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time.
How good does your personal credit need to be? If your FICO Score is 750 or above, you shouldn’t have any problem obtaining business credit. In the past, a 720 score was considered good enough, but times have changed and lending standards have become stricter. You can get your FICO scores at www.myfico.com. A one-time purchase costs $15.95.
What if you don’t have great personal credit? Can you still establish business credit? You can, but the first thing you should do is work hard to improve your personal credit score. This is a process that involves patience, diligence, and perseverance. Start by paying all your bills on time.
Also pay down your debt on credit cards so that you carry no more than 10 percent of the maximum credit limit. For example, if your credit limit is $1,000, pay it down to $100. Over a period of six to eight months, you should see begin to see your credit score improve.
Keep in mind that closing down accounts won’t improve your credit score. Try to keep a small balance on your accounts (again, less than 10 percent of your maximum credit limit) and pay them off in timely manner. This will help you establish a history of credit worthiness.
One final tip is to always carry an updated copy of your personal credit report when you apply for a business loan or lease. Why? Because it hurts you score every time a potential creditor contacts a credit bureau for a copy of your report. By presenting your report to a lender, you limit the number of inquiries. Instead of 10 inquires, you might only have 1 or 2, which can ultimately improve your credit score.