Merchant Capital

7 Steps To Improving Your Personal And Business Credit Scores

Having good credit is the place you want to be: With good credit, you can easily access funds and grow your business. The problem is that over the years and due to current events, many business owners are worried about their credit scores. If this sounds familiar, consider these 7 steps towards improving your credit score.

Step 1: Understanding your credit score

The first thing you need to do is check what your credit score is through an available credit bureau. Various engines measure your score differently. Either giving you a score of between 0 - 999 or working out 0 - 750. Both versions are fine, but make sure you understand which model they are using so you can understand how to assess the results. In the ‘750’ model anything over 650 is considered excellent, 600-650 is very good, 550-600 is good, 490 - 550 is subprime and 490 and anything below is considered poor credit. Any individual from the 550 and below will find it more difficult to get a loan and they will have much higher interest rates. In the ‘999’ credit engine, excellent is in the 767 – 999 range, good is in the 681 – 766 range, favourable is plotted 614 – 680, the average is 583 - 613, below average is 527 – 582, unfavourable is 487 – 526, and poor is 0 - 486.

Step 2: Check and rectify any disputes or judgements against you or your business profile

It can happen that people are not even aware of disputes against their names, even if only for very low amounts. If this is the case it is important that you pay down any amounts owing and have them removed off your credit profile so that future opportunities aren’t affected by past debt. 

Step 3: Always pay your bills timeously and in full

Your payment history actually makes up around 35% of your credit score. So it is important that you always pay your bills on time and in full. To make things easier for yourself, consider debit orders for fixed expenses, and set reminders for others. This kind of good housekeeping has an important knock-on effect on your overall credit score. 

Step 4: Separate personal expenses from business expenses

While it may feel simpler to put certain expenses like the bond and gardening services through your business, it is important to distinguish between personal and business expenses so that when it comes to tax season you know exactly what to allocate where. Further to this, if your business fails, then your personal assets could also be at risk which would negatively affect your personal credit score. Also, mixing your personal and business accounts can prevent your business from building a strong credit score of its own. 

Step 5: Keep credit usage lower than 30%

Credit bureaus reward you if you have credit but don’t use it too much. The way to do this is to either increase your limit so that your normal monthly usage falls under 30%. The other option is to pay down what is currently owed on your credit card and make sure you are falling below the limit. Never spend what you don’t have. 

Step 6: Avoid debt consolidation and debt review if possible

When your monthly payments are out of control, debt consolidation may seem like a good solution. But there are downsides to this. The concept of debt consolidation is to take out a new loan agreement with a single provider, who you pay a single monthly amount to, and they in turn pay off your creditors. When you take out a debt consolidation loan the enquiry lowers your credit score, and your overall score can be affected for the full duration of paying off the loan.

With debt review, the intention is to create a way to pay back all your creditors in a way that doesn't cripple your monthly finances. Your debt review service provider contacts your creditors on your behalf to see if they can arrange lower repayments. During this time, your service provider essentially has control over your credit and the perception that's created is that you are a person who can't control their finances, therefore, it'll be extremely difficult to take out any other loans during this time. This, and debt consolidation, will affect how credit-worthy you appear to future lenders. 

Step 7: Limit hard credit score enquiries

There is a difference between hard and soft credit score enquiries. Soft enquiries don’t affect your credit score (like when you do it yourself). A hard enquiry is made when you apply for a car, bond, business finance etc. Remember that every time you go through an aggregator for a hard enquiry it shows up, and with these types of credit applications you will have a credit check run by each provider. Too many of these can affect your score for up to 2 years so the less you do this, the better. 

The bottom line

Good credit scores are essential to keep you in a strong position to apply for future loans and other credit opportunities. Fortunately, if you find yourself in a bad position when it comes to your credit scores, there are things you can do to systematically build up your credit scores and get you back into a strong position for future business growth. 

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