For many small-company owners, especially those who haven’t been in business for that long, your personal credit score is the key to getting anything from a bank loan to a lease. “It’s simply crucial to finding financing,” says Gerri Detweiler, credit advisor at Credit.com and author of Business Credit Success (Success Publishing, 2010).
For that reason, before you even approach a bank, you need to figure out what your credit score is and how you can boost it.
Here are a few steps you should take when starting this process:
Read your credit report—and correct mistakes. The first step is to get a free copy of your credit report from Experian, Equifax and TransUnion, the three major credit bureaus. Then, look it over and make sure the information is accurate. If you find a mistake and you have documentation to back up your side, put your dispute in writing, including a copy of the paperwork.
Generally, positive information remains on your report indefinitely, while negative data stays for seven years. An exception is a tax lien, which remains for 10 years. And if you’ve fallen behind on a student loan but bring yourself up to date, the negative history will be deleted.
But you also need to get your credit score, a number that classifies just how good or bad a credit risk you are and is determined by a formula. The most widely used score is called FICO and it ranges from 300 to 850. You can order your score from the credit bureaus’ websites, though they’re not free.
Pay your bills on time. It’s probably the single most important step you can take, according to Detweiler, since about a third of your score is based on your payment history. For bills you may have paid late, keep in mind that older information is weighted less heavily than more-recent activity. “Time heals all wounds when it comes to your credit,” says Detweiler.
Pay down credit-card debt. Another part of your score is determined by the amount of debt you owe. And the closer you are to your credit limit, the worse it is for your score. (You won’t be penalized in the same way for carrying a balance on charge cards, since they don’t have a credit limit.) Remember: timing is everything. Even if you pay in full every month, credit reports capture information on the day a transaction is reported. So, if you haven’t paid for that billing cycle, the balance will be factored into your score—and lower the total.
Keep your old accounts open—and try not to close too many others. Long-standing accounts help you establish a track record. “Try to keep your oldest accounts open and active,” says Detweiler.
At the same time, don’t shut down a lot of more-recent accounts, either. It’s all about what Detweiler calls the “utilization ratio.” FICO examines the total amount of credit you have available when all your accounts are combined and how close your outstanding balances are to that amount. “If you have five cards with a total limit of $50,000 and a $2,000 balance on one card, then you aren’t approaching the utilization level,” says Detweiler. “And that’s good.”
But, close a few accounts, and your aggregate credit limit will decrease, thereby making your outstanding balance a bigger portion of the total.
Don’t open a lot of new accounts. Even if your favorite clothing retailer is offering a great discount to anyone who gets a new store-credit card, don’t give in. “Every time a company looks at your report, that inquiry can affect your credit score,” says Detweiler. Keep it to no more than one or two new accounts a year.
Get a mix of credit types. The FICO formula looks kindly on multiple categories of credit. That means having not just credit cards, but anything from an installment loan and mortgage to a car loan, as well.
If your score is low, wait it out. Since information reported in the past 24 months carries the most weight, says Detweiler, “You may need to bootstrap while you work on building a better credit score.”
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