You have probably heard that lenders look at your credit score before approving a business loan. Your credit score reflects your ability to pay off debts. This also helps lenders to determine how risky you are as a borrower.
This article will explain why personal credit is important when you are looking for business financing. This article will provide you with practical tips to help you build your credit score and prepare for future loan applications.
What is personal credit?
Creditworthiness is determined by an individual’s credit history. This is a summary of three digits that shows if you pay your bills on-time and in full. It shows creditors such as banks, credit unions and alternative lenders if you are a risky borrowers or if you pay your loans on time.
Your personal credit history is the record of your financial transactions. This includes everything from your mortgage and auto loans to your payments on credit cards.
What is the measure of your credit score?
Fair Isaac Corporation (FICO), and VantageScore are two popular brands that determine your credit score. FICO, the oldest credit-scoring company, is trusted by millions of Americans. VantageScore, which was founded in 2003, is a joint venture created by Experian Equifax and TransUnion.
Both companies use the same credit scoring model: FICO and VantageScore have a range of scores between 300 and 800. Let’s examine how FICO scores can be determined for this discussion.
Your FICO score is based on five factors: your payment history (35%), your total debts (30%) your length of credit history (15%), your credit mix (10%) and your new credit (10%).
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- Payment historyIt’s the record of your payments, whether you made them on time or not. It gives you an overview of how you pay, and whether or not you have missed payments on bills or debts in the past.
- Total of all debts accrued throughout your payment historyTotal debts is the sum of all your loans over a period of time, including auto loans, mortgages and credit cards. Your FICO score is affected by your total debt.
Reduce your total debt to improve your FICO Score and become a more attractive applicant for future loans.
- Credit history lengthThe majority of small business owners do not get approved for loans because they don’t have enough credit history. Your credit history can tell you if credit has been used responsibly over the years. Your credit history will tell you how experienced and credible your debt repayment skills are.
If you’ve used credit responsibly for a long time, this will improve your score. A short credit history could also lower your score.
Divide the age of your oldest account by the number of accounts that you have to determine the average credit history.
- Credit mixThe credit mix is the combination of different types you have in your credit report. Diverse types of credit will improve your FICO rating because it shows that you are able to handle various types of debt. Diversifying your credit is one way to increase your FICO score.
- New credit numberThe number of credit accounts refers to how many new loans you have applied for in a given period. Lenders will check to see if you have been shopping for as many credit cards as possible.
What is considered a good credit rating for an individual?
A good personal credit rating can help you to get approved for a mortgage and receive better terms. For example, a lower rate of interest. You may be able get a loan even if you have bad credit. However, the interest rate will probably be higher. How can you tell if your credit rating is high?
As we mentioned before, credit scores can range from 300 to 850. A good credit rating is defined as a credit score of 580 or more. Your credit rating will determine your ability to secure a loan at a lower rate of interest and with better terms.
Why is it important for lenders to know my personal credit score?
If you do not have a business credit, lenders will first look at your credit history. In the absence of a business credit, lenders will look for any evidence of your payment history through your personal account to determine how risky it is to lend you money. Most small business owners don’t have the time to establish a strong business credit score unless they are in business for many years. A business credit score can range from 0 to 100. Lenders will require that you have a minimum rating of 75 in order to qualify for a loan.
A low credit score could result in you not being approved for a personal loan, or you paying a high interest rate. A low credit score can also indicate that you are more likely to default on a new loan. This is not good for the lender.
Personal credit reports also show lenders you’ve had strong relationships in the past with various types of creditors. If you apply for a business card, the lender will check your credit history to see how well you have managed your personal cards. They will want to know if you pay your debts consistently and how much credit you use.
When you apply for new credit, lenders are required to check your credit rating. It helps them decide if you are eligible for a new credit, and if you are, what terms you will be offered.
It is important to improve your credit score before you apply for financing. Check your credit report every year at least to see where you are. Don’t worry; requesting your credit report won’t affect your credit score.
Build your personal credit
You can improve your credit rating by doing a few simple things. Here is a list of important things to check.
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- Pay your bills as soon as possible.
- Keep your balances low.
- Your credit card utilization should be below 30%.
- Avoid opening new credit card, especially if you have debts.
- Close old credit accounts as they will negatively affect your credit rating.
- Consolidate your debts if you can.
- Refute any errors on your credit report such as misspelled words or incorrect addresses.
It is also helpful to consult with financial experts and lenders, who can increase your chances of being approved for a mortgage. You can improve your score with a little effort and convince lenders to work on your behalf.