Running your own business can be stressful, especially when you have to access a line of credit to pay bills or need operating capital to expand operations. This is why your credit score is important. It is a signal to lenders that you can repay the money you borrow. If your business runs out of cash, you may go out of business fast.
It is difficult to overestimate the importance of credit history in the modern world. A credit score affects everything from taking a $5.000 loan for bad credit to buying a phone or buying a house. Even on loan, you can pay less if you have a good credit history. Because most banks and private lenders check your credit report through major credit bureaus.
But life is life, and sometimes our credit scores are not as good as we want them to be. So how to turn a bad credit score into a good one? What should you do if your credit score is stuck? And how to stop being “credit invisible”?
What do credit scores depend on?
First, we need to find out what affects your credit score. There is a kind of formula that consists of five factors. These factors influence whether your credit score will increase or decrease. Credit score depends on payment history, credit utilization, length of credit history, credit mix, and new credit.
Payment history – 35%. All you have to do to keep this item in order is to make on-time payments. Late or missed payments are also reflected in your credit report and worsen your credit score. So you need to keep track of payout times and avoid late payments. And don’t forget that rent payments also affect your score.
Credit utilization – 30%. The credit utilization ratio is calculated as follows: the current debt amount divided by your credit limit. So credit scores rise if this figure is low. In a FICO Score, it is recommended to keep your credit utilization rate below 30%. By the way, the FICO Score is used by lenders to make decisions about your ability to pay.
Length of credit history – 15%. Obviously, the longer your credit history, the better. In this way, business lenders can make sure that you fulfill your obligations and do it regularly for a long time.
In rare cases, canceling a credit card account can work to your advantage and make your credit score even better. But in general, it’s best to leave them open. You should not expect a rating increase by opening the first credit account.
Credit mix – 15%. The gradual addition of new debts will positively affect people’s credit reports. In the eyes of your lenders, different types of credit, such as mortgages, personal loans, and credit cards, make you more reliable. Of course, provided that you make your timely payments. But it is important to remember that applying for several new credit accounts at the same time can, on the contrary, ruin your credit score.
New credit – 10%. Frequent applications for loans can lower your credit score. Don’t forget about balance.
Derogatory marks and how long do they stay on your credit history
The borrower does not always fulfill his obligations to the credit issuer. And every late payment, for example, shows up in his credit score. So this can be a big problem and the main reason for the low credit score. There are three types of derogatory marks: late payment, collection accounts and bankruptcies.
Late payment. Sometimes you can save your credit score from a late type of payment (and not just by paying on time). The fact is that creditors usually report not every day but once a month (sometimes every 45 days). And suppose you are lucky enough to make a payment during this “window”. In that case, information about the delay may not appear on your credit report. But if it doesn’t happen, late payments will stay on your credit report for seven years.
Collection accounts. If you delay payments for several months, your debt may be transferred to a collection agency. Then, you will get derogatory marks in addition to paying off debts and not-so-pleasant communication with collectors. It will stay on your credit report for seven years as well.
Bankruptcy. Bankruptcy is explained when you are unable to repay your existing debt. There are two types of bankruptcy: chapter 7 and chapter 11. The difference is that under chapter 11 the debt is restructured, while under chapter 7, business operations cease completely. And don’t wait for a good credit score after that. Derogatory marks will stay on your credit score for seven years in case of chapter 11 bankruptcy and ten years in case of chapter 7 bankruptcy.
How to improve your credit score
Manage your payments
It may seem obvious, but making your payments on time is important. Try automatic payments. This is especially convenient if you have more credit card debt than one. Consistent payments will do more for your credit score than anything else. Check your credit card balances, keep an eye on all your credit accounts, and control your personal finance. Because credit card companies report to the credit bureau if you are making your payments on time, you should keep your credit card balances low.
Review your reports
Your credit report may often contain errors, even such blunders as derogatory marks. So it’s important to check your credit report to find the mistakes and dispute them. You can have your free credit report on AnnualCreditReport.com.
Pay down your debt
It’s the fastest way to make your credit score much better. If you pay your debt, then your credit utilization becomes lower. So your score becomes higher. And that’s exactly what you need. Moreover, it’s a fast way to improve your credit score. After you pay off the debt, the creditors report to the credit bureaus. So you can see progress on your score within 30 days.
Even more, you can save some money by paying your credit card debt because you don’t need to pay interest rate. But note that your credit card company may charge an additional fee for early repayment.
Change your credit card
Use a secured credit card. If you have a limited credit line or poor credit history, secured credit cards can help. These cards require a deposit. And this deposit will become your credit limit. So you can improve your credit score. Later this card can help you to build credit if you do not have missed payments.
Use late payment forgiveness
Since paying on time is 35% of your FICO Score, it should be taken seriously. But if you missed a payment, let’s say by accident, the first thing you need to do is call your bank. You can ask for payment forgiveness if you have always paid on time before this event. But be prepared to pay off the payment right away, and keep in mind that you can use this only once or, at most, twice.
Increase the credit limit on the card
A credit limit increase will make your debt smaller for credit utilization rate. Just do not forget for what purpose you increased the credit limit and do not spend more than you can pay later. The influence that a credit line increase could have on your credit score depends on the boost you get from your credit card issuer.
This is available credit for those with little or no credit history. The peculiarity of this type of loan is that the money goes to your bank account. But you can get them only when you pay off the debt. Then, your lender reports to at least one credit bureau about your payments. If payments are made on time, your credit score will go up.
Report rent and utility payments
Paying your utility bills on time can also help. Just make sure your property management company or landlord reports payments. If not, add these payments to your credit history by yourself. Again, Experian boost works well for this.
Consolidate your debts
If you have several loans, it is practical to consolidate them. A debt consolidation loan can be more than just convenient because you only have one payment. This can be beneficial if you get a lower interest rate than those that were on outstanding loans.
Become an authorized user
First, you need to find someone with a good credit score. Second – you need to ask him to add him as an authorized user. It does not require access to a card or even an account number. This method is suitable for beginners in the field of credit. It doesn’t work so well for correcting history. Once this is reported to the credit bureaus, your credit score will go up. In this way, you can quickly earn extra points for yourself.
How quickly you can improve your credit score will depend primarily on the reason why it was low. However, you must be prepared that this will not happen overnight. Credit score recovery time can vary from 30 days to ten years.
It’s easier to go from poor to fair credit. Watch your credit card balance even if your credit limits are not so high, make payments on time, check credit reports, and use credit-builder loans. You can become an authorized user as well. However, it will take several months for your credit score to go up.
If your credit score is low because of the amount of your debt, it all depends on whether you find the right way to solve this problem. First, don’t forget to check your free credit reports to be sure there are no mistakes. Change your credit card to a secured one, and increase the credit limit on an existing card. Consolidate all your debts, find a loan with a lower interest rate and use late payment forgiveness in case of emergency. And make sure utility bills are added to your history.
Patience will be most needed for those whose history has been damaged by missed payments and, especially, by bankruptcy. Unfortunately, it may take years to restore the rating after that.