For most entrepreneurs, access to start-up capital is a critical concern. While financing a new enterprise nowadays is a little easier thanks to sites like Kickstarter and Indiegogo, traditional funding channels are still important. When you need a loan from a major financial institution, your personal credit score will largely determine how much money you can borrow. If you need to improve your credit score, the following guide should prove to be quite helpful.
Credit Scores in a Nutshell
A credit score is essentially a gauge of how likely you are to pay back borrowed cash. It also determines the interest rates that you can expect on any amount of money that you’re loaned. The scale ranges from 300 to 850 and depends on a variety of factors. The mean FICO credit score is 695 for American citizens. A score of over 720 is considered good to excellent by credit-reporting bureaus like Equifax, Experian and TransUnion.
Why Good Credit Matters to Entrepreneurs
Ultimately, solid credit can have a big impact on your bottom line. Everything from interest rates on loans to insurance premiums depend on your perceived creditworthiness. What’s more, it can affect the kind of talent that you can attract in the employee department if prospective hires dig deeply into your finances. Lousy credit will cost you hundreds if not thousands of dollars per month in business expenses that could otherwise be avoided.
What MyFico Can Do for Your Personal Score
If you’re looking for an all-in-one platform for identifying credit problems and fixing them as quickly as possible, myFICO is the way to go. Get Your Credit Scores & Reports From All 3 Credit Bureaus. and repair your credit gradually. MyFico has a slew of tools available for struggling entrepreneurs that make credit monitoring and improvement a breeze. Their peerless real-time updates and analytics make them the first name in credit rehabilitation.
The Core Components of a Credit Score
As you might expect, your credit score is largely computed using a fairly standard formula. While the weighting of each component of the formula varies based on the credit reporting outfit in question, the main ingredients are the same. These would be payment history, debt-to-credit ratio, length of credit history, amount of new credit and the specific mix of credit types that you enjoy. Here are a few ways to improve each component of your credit score recipe.
Roughly 35% of your credit score is based on your history of paying off loans within the terms of the agreements. If you have a history of late payments on anything from utility bills to mortgages, it’s going to hurt you. While there’s no way to erase late payments on debts from your credit history, you can establish a pattern of improved payment timeliness. Pay every bill on time to demonstrate your commitment to meeting your financial obligations.
Otherwise known as credit utilization, the amount of debt that you carry compared to your total credit potential makes up 30% of your score. Let’s say that your credit limit is $30,000 and you’ve only borrowed about $5,000 at the moment. In this case, you’re only utilizing about 17% of your credit capacity. The fact that you’re not over-leveraging yourself and taking a prudent approach to credit utilization will reflect favorably on your long-term score.
Length of Credit History
Naturally, the length of time that you’ve had a credit history at all in the eyes of the major reporting agencies impacts your final score. About 15% of your credit score depends on how long you’ve been borrowing money and faithfully repaying loans. All things being equal, personal credit will gradually improve as you get older even if you’ve made some mistakes in the past. That’s why building credit at a young age is so important.
Credit Accrued Since Your Last Report
Ultimately, your credit score isn’t computed in real time. It only changes when specific events like paying off a loan or acquiring a new one from a trusted financial institution occur. Changes in your creditworthiness that have occurred since the last time that you requested a report account for about 10% of your score. That’s why it’s important to work on your credit history regularly and ensure that it’s updated at least twice a year.
Overall Mix of Credit Types
If you simply borrow a modest amount of money from a bank for general expenses and pay it back, your score won’t improve that much. What matters more is using credit for a variety of purposes such as mortgages, auto loans and start-up capital. This demonstrates an understanding of risk and diversification to financial institutions that can bump your credit rating up significantly. Having a well-balanced mix of credit counts for about 10% of your final score.
Two Common Credit Repair Options to Mull
If you suffer from bad credit, there are really two options available for fixing the situation: doing it yourself or hiring a professional. If you decide to take the DIY route, there are a variety of tactics that you can employ. If you don’t mind spending a little money up front to rectify the problem, there are many companies like Lexington Law and Sky Blue that will pound the pavement on your behalf. Lexington Law offers a Free Credit Consultation – Includes Credit Report Summary & Score.
How to Build and Repair Credit
Whether you’re starting from scratch or trying to repair a damaged credit score, a few options are always worth pursuing. Paying off as much debt as possible is a good start. Taking out a few secured credit cards from the likes of USAA or Bank of America is another smart idea. Having a family member or business associate with great credit adding you to their credit account as an authorized user is always productive.
The Importance of Reviewing Credit Regularly
There are a few reasons why using a credit report service to keep an eye on your score is so important. For one thing, doing so can speed up the credit repair process. Furthermore, tracking your score regularly can help you to budget your entrepreneurial efforts more wisely. When reviewing your report, look for liens or judgments that you may not have been aware of and address them. Make sure that your scores and history are consistent across multiple credit bureau reports.
Personal Credit Best Practices for Entrepreneurs
If you want to maintain and build your credit, paying every bill on time is the obvious place to start. Set up payment reminders to ensure that you’re meeting your obligations. Whenever possible, keep your debt-to-limit ratio at or below 30%. Always fix any errors that you see in your credit report as soon as possible. Finally, don’t apply for credit that you’re not absolutely sure of getting at a rate that’s favorable.
Building Credit Is a Marathon, Not a Sprint
While it’s natural to want to improve your credit as quickly as possible, rushing the process is usually a bad idea. Pace yourself and understand that credit is never repaired or increased to any great degree overnight. Come up with a plan based on the credit score recipe mentioned above and stick to it. If you make improving your credit a daily priority, you can achieve impressive results within a year or two.
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