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Here's how to prepare your personal credit for your future business financing needs.
5 min read
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It often requires funding to take your business to the next level, whether it's capital to purchase more inventory required to scale, or make an acquisition that will contribute to your growth. The last thing you want to hear when applying for a business loan or credit card is, "Denied!"
Most business funding, from SMB loans to credit cards, will require a personal guarantee. This holds you personally liable in the event that the business goes belly up, and your personal credit score is taken into consideration when evaluating the credit application.
A low personal credit score can prevent you from taking advantage of opportunities you encounter. Those magic three-digit numbers from Equifax, Experian and TransUnion hold a lot of weight -- and they range from 300 to 850, with the higher the score, the better your credit rating.
While there are a lot of factors that contribute to your credit score, there are a few things you can do to help ensure you are sitting in the best possible position if and when the times comes to apply for funding.
1. Always pay your bills on time, even if that means eating ramen.
Missing a payment and getting hit with a 30-day late payment delivers a serious blow to your credit score, whether it's a $3,500 mortgage payment or a $100 minimum credit card payment. A late payment being reported to the credit bureaus can instantly lower you score anywhere from 50 to 150+ points, as well as automatically disqualify you from future credit approval.
Making all of your payments on time is very important, even if you have to get creative. Sometimes the circumstance is out of your hands, but if you can, eliminate any unnecessary spending to make sure your credit obligations are taken care of if things get tight.
2. Constantly monitor your credit files for errors and fraud and dispute if needed.
You should subscribe to a credit monitoring service that not only notifies you of any changes, both positive and negative, but also allows you to pull a fresh 3-bureau report every month. Personally, I use USAA's credit monitoring service, which I pay $12.95 per month.
There are plenty of options available, but make sure the one you go with monitors and provides access to all three bureaus -- many of them just offer one or two. Not only will you be notified in the event of negative information or changes, but you will also be able to pull a new report every month and physically review and audit your credit profiles. It's well worth the money and time -- you can prevent a very messy situation in the future by staying on top of this.
Unfortunately, credit scores aren’t always accurate. Something as simple as similar names and addresses can cause wrong information to hit your files. According to a study conducted by the FTC, a quarter of Americans have errors on their credit report. Furthermore, 80 percent of those with errors saw their score increase after the incorrect items were removed.
3. Keep your old accounts open -- even if you don't use them.
While it may be tempting to close old credit card accounts, this can actually lower your scores. The credit bureaus take into consideration the average age of your accounts when determining your score. If you have older accounts on your file it increases the average age of your accounts, which in turn will increase your score.
Also, avoid opening multiple accounts in rapid succession, since it will lower your average account age and inquiries on your credit score will drop you a few points each as well. If you leave old accounts idle for too long the card issuer may close them due to inactivity, so make it a habit to run a very small purchase on each card every month to ensure they remain open -- something like a tank of gas or a coffee will suffice.
4. Maintain an overall low utilization ratio.
One of the biggest factors in your overall score is how much credit you’re using at any given time. For example, if you have credit cards with a combined limit of $100,000 and have a $60,000 balance across those cards, you are using 60 percent of your available credit. A rule of thumb is to keep your utilization below 30 percent. Going above this number can have a negative impact on your score.
There are two routes you can take to lower your utilization. You can pay down your balances to get below 30 percent or you can contact your credit card companies and ask them to raise your limits. This has the effect of increasing your total available credit, which reduces your overall utilization -- but be aware that many creditors will perform a hard inquiry when evaluating limit increase requests.
5. Ask family to add you as an authorized user on aged accounts.
Many credit card companies will report authorized users to the credit bureaus, which allows you to inherit that card's history and limit. This can offer a huge boost in credit history, greatly reduce your utilization and raise your score.
It's important that you only pursue cards that have a pristine payment history, large limits and never carry huge revolving balances. Being added to a card with a shaky payment past or one that is always maxed out can have a negative impact on your credit scores.
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