Small Business Owners: What’s Hurting Your Credit Score (and How You Can Improve It)
For small business owners, your credit score is your golden ticket to ensure your access to the working capital loans you need for your small business. Credit scores are calculated by using data from your credit files and issued by credit reporting agencies like Equifax and TransUnion. Based on your previous activities and history recorded on your credit files, credit reporting agencies will give you a credit score calculated by their credit model and credit rating system. This number can impact your likelihood in securing capital like small business loan and mortgages.
Here we have broken down the most common reasons why your activities may be hurting your credit score, preventing you from acquiring an online small business loan. While a low credit score means you will have difficulty in securing an online loan immediately, there are things you can do to improve it.
Utilize "Good" Credit
If you have never had a credit card or you never use your credit card, you will not have credit history. In order for credit reporting agencies and lenders to see you have good credit, you need to purchase items with credit and pay your dues every month. A good credit score is not handed to you immediately, it is earned and built slowly over a period of time.
A continuous cycle of credit spending and diligent repayment is key to building a high credit score for anyone who needs big items like a working capital loan for their small business or a mortgage for their property in the future.
Pay Your Debt On Time
According to FICO, your credit payment history is the most important factor; this is the first thing any lender wants to know when reviewing your online loan application. This history shows when you paid your bills and includes any late or missed payments. Your credit score might be impacted if you have debts written off by an agency or if you have declared bankruptcy in the past.
If incidents with missing or late credit card payments is reoccurring, we suggest you set a monthly reminder when your payments are due to ensure no more payments are missed.
Pay Your Debt in Full Each Month
Paying your credit card debt at its minimum payment will likely not have an impact to your credit score if it isn’t a regular occurrence. However, if credit agencies see you have thousands of dollars in debt constantly carried over from month to month, this raises a red flag in their systems and can hurt your credit score.
To avoid this, we suggest your debts are paid on time every month. If you are struggling to repay your debt, consider exploring ways to manage your debt with options like debt consolidation and seek counsel to help you make smarter financial decisions.
Think Before You Close Accounts
If you have too many credit accounts opened with balances carried, this is a sign to credit reporting agencies that you may be in financial distress and will be taken into account when evaluating your credit score.
Credit card companies are always offering great financial benefits and cashback rates to incentivize people to sign up for new credit cards. However, having too many on hand will not be good for your credit score. While you may be tempted to cancel your credit cards in order to gain financial control, we suggest you to think before you cancel. Consider the age of your card for example, did you know the duration of your account factors into your credit score?
Revisit and Revise Your Financial Budget
If you are using your credit cards down to the dollar of your limit, you are ruining your credit score. In the eyes of credit reporting agencies, maxing out your credit cards and going over your limits translates to undesired balance-to-limit ratio. The more often you are close to your limit, your credit score will suffer - even though you maybe able to pay the debt off on-time.
Revisit your financial budget quarterly and see if there are is unnecessary spending that can be cut down. If you’re in a situation where you have sufficient capital on hand and are able to pay off debt in time, you may want to consider exploring other credit options with a higher credit limit or calling your credit card representative to see if you can raise the limit of your account.
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About the Author
Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.