Your personal credit score has a big impact on your ability to get business financing and how much you will have to pay. Check your credit score here for free, then compare it with the credit score typically needed to qualify for popular types of business loans:
- SBA Loans and Bank Loans – Above 650
- Commercial Real Estate Loans – Above 650
- Buying a Business Loans – Above 650
- Peer2Business Loans – Above 620
- Online Loans – Above 500
- Invoice Factoring – Above 500
- Equipment Financing – Above 500
If your credit score isn’t where you’d like it to be, you can increase it with some adjustments to the way you handle your finances. In this article, we’ll share with you some tips on how to improve your credit score and whether and when it makes sense to use a credit counseling or credit repair agency.
Step 1. Find Out Where You Stand.
You can’t improve your credit score without first knowing where you stand. According to a survey by the American Bankers Association, just 42 % of Americans know their credit score.
For free access to your personal credit score, visit Nav, a credit monitoring platform. Nav will show you your FICO score, which is the main consumer credit score. It ranges from 300-850, and the higher the score the better. The nice thing about Nav is that it also tracks business credit, allowing you to monitor your personal and business credit in one place.
Experian, TransUnion, and Equifax are the three primary consumer credit agencies. While these credit bureaus won’t give you your credit score for free, they will give you free access to your credit report once a year. For access, visit AnnualCreditReport.com. Your credit report will tell you why your credit score is what it is. The reports will show how you perform on the different elements that make up your credit score:
- Payment history on loans and credit cards (including collections and bankruptcies) – makes up 35 % of your credit score
- Debt level and credit utilization (i.e. the amount of credit you have used out of the credit available to you) – makes up 30 % of your credit score
- Length of credit history – makes up 15 % of your credit score
- New credit accounts and inquiries – makes up 10 % of your credit score
- Credit mix (i.e. types of accounts you have) – makes up 10 % of your credit score
Remember, there are things other than your credit score that can be a nonstarter with business lenders. For example, if you have a recent bankruptcy, foreclosure, or tax lien, then you will have trouble getting a business loan regardless of your credit score.
Step 2. Fix Errors On Your Credit Report To Increase Your Score.
Almost 80 % of credit reports contain errors, and by getting them fixed, you can improve your score. For example, you might find that a loan went to collections when you actually paid if off on time, or an account may show up on your report that you never opened.
By law, both the credit reporting agency and the creditor are required to correct inaccurate information in your report. It’s completely free to dispute inaccuracies, and you can do so in one of two ways:
File a dispute with the credit reporting agency, either electronically or by mail.
Include copies (not originals) of documents that support your claim;
Go directly to the source, and contact the creditor to file a dispute.
Follow the procedures that the creditor tells you.
After you report the error, either to the agency or to the creditor, the creditor has 30 days to investigate the information in question. If the creditor finds that the disputed information is inaccurate, it must notify all three credit reporting companies so that they can correct the information in your file. At that point, the credit reporting agency must give you a free updated copy of your report and, at your request, send the updated report to entities that have recently checked your report.
If the dispute is not resolved in your favor, you can ask for a statement of the dispute to be included in your file. This way, lenders who check your credit report in the future will know that you believe the negative information to be incorrect. If you’re unhappy with the way that a dispute was handled, you can also get further help by submitting a complaint to the Consumer Finance Protection Bureau.
Unfortunately, accurate but negative information can only be removed from your report with time. Late payments and collections appear on your report for 7 years and bankruptcies for 10. The silver lining is that negative information has less impact on your credit score as time passes.
Step 3. Five Tips on How to Improve Your Credit Score.
Beyond correcting errors on your credit report, there are other ways to improve your credit score. None of these are a quick fix but can make an impact in a few months to a year.
1. Use credit responsibly.
If you haven’t built up enough credit, you could have a lower score or even be unscorable. One way to build up credit is by getting a credit card, charging some expenses to it, and paying off the balance each month. By having more credit available to you, you can increase your credit score.
Just make sure you don’t utilize all the credit you have, or your score could actually decrease. In other words, just because you have a new credit card with a $5,000 credit line, don’t max it out. Ideally, your credit utilization, which is the amount of credit you use out of the credit that’s available to you, should be 30 % or less.
Don’t close unused credit cards either (unless there’s a high annual fee, and the lender won’t waive it for you). Doing so reduces your available credit balance and closes credit lines with history, and this can hurt your credit score.
2. If you have missed payments in the past, get current and stay current.
Payment history makes up a whopping 35 % of your credit score, so paying your bills on time will have the greatest payoff for your score. According to Equifax, even a payment that’s just a few days late or one late payment can dock your score by 50-100 points! The good news is that the impact goes both ways. Just as a single late payment can really impact your score, paying on time can significantly improve your score as well. As positive payment history accumulates, it will outweigh past late payments.
3. Pay off as much debt as you can.
After payment history, the next largest share of your credit report, at 30 %, is made up by outstanding debt. The more debt you have relative to the amount of credit that’s available to you, the lower your credit score will be. In other words, if you have a $6,000 credit limit on your credit card and use every dime of it, your credit score will take a hit because you’re relying too heavily on debt.
Chip away at your credit card debt by paying off as much as you can every month. Most credit card companies report to the credit bureaus every 30 days, so if you’re diligent about paying down your balances, you can see your credit score increase in 2-3 months.
4. Negotiate with your creditors and lenders.
Sometimes, it can feel like you’re under a mountain of debt with no way out. If you’re not able to manage your debt level, I suggest contacting your creditor or lender. Sometimes, the creditor will agree to accept a lower payment on an outstanding bill or will work out a payment plan with you. When negotiating with a creditor, your ultimate objective is to convince them to list the account as “Paid as Agreed” or “Current” with the credit reporting agencies. This shows that you favorably settled the debt and will help raise your credit score.
5. Limit rate shopping when looking for business financing.
Every time you apply for a loan or a credit card, the creditor will do a hard pull of your credit, which can dent your credit score by 1-5 points. I’ve seen clients who started out with a decent credit score, only to see it sink after applying for a bunch of loans. When you’re on the market for a business loan, apply strategically to a small set of lenders.
There are special rate shopping rules for mortgages, car loans, and student loans that minimize impact to your credit score, but these do not apply to business loans.
Step 4. Should You Use a Credit Repair or Credit Counseling Agency?
There are three kinds of services that can help people with bad credit scores:
- Credit counseling agencies
- Credit repair agencies
- Credit monitoring platforms
Credit Counseling Agencies
Credit counseling agencies will help you manage debt and develop better financial habits, and they may offer courses on personal finance. You can think of them as an educational resource that can help you improve credit in the long run. They are usually free or charge nominal fees. For help finding a credit counseling agency near you, you can use the Department of Justice’s online directory.
Credit Repair Agencies
For more immediate assistance, you can seek out a credit repair agency. These are agencies that can help you remove negative information from your credit report for a fee. According to Dave Fulk, president of credit repair service National Credit Federation, credit repair services typically cost anywhere from $500-5000.
Anything that a credit repair agency can do, you can do yourself for free. However, credit repair agencies can save you time by, for example, reaching out to creditors to negotiate a debt settlement on your behalf or by helping you dispute a complicated error on your credit report. The good agencies, says Fulk, will honestly evaluate whether they can help you or if you’re better off doing things yourself. Unfortunately, there are a lot of credit repair scams out there, so it helps to know what a credit repair service can and cannot do.
What a credit repair agency can do:
- Help you dispute inaccuracies on your credit report. Credit repair agencies can help you put paperwork together for a dispute or even eliminate the need for a dispute by contacting the creditor. We recommend submitting a dispute yourself however because creditors are not legally required to investigate disputes that are submitted by someone other than the consumer.
- Verify debts with your creditors.
- Negotiate with creditors on your behalf to settle an outstanding debt.
What a credit repair agency cannot do:
- Remove negative but accurate information from your credit report.
- Get you a “new credit identity” to help you hide a bad credit history. Your social security number or business EIN identifies who you are on loan or credit card applications. Trying to get a new EIN or SSN to hide a bad credit history is illegal.
Credit Monitoring Platforms
Credit monitoring platforms such as Nav are yet another resource for improving credit. Nav will show you your personal and business credit reports and scores, help you track changes in your reports and scores over time, analyze why your score is what it is so that you can pinpoint areas of improvement, and provide informational articles on how to raise your score.
Avoid the following types of agencies as these are probably scams:
- Agencies that have high fees or request “voluntary contributions” as this can put you in deeper debt, particularly if they ask you to pay upfront or a flat fee before doing any work for you.
- Agencies that require personal information from you before telling you about the services they provide.
- Agencies where employees are paid more only if you pay a fee or sign up for a particular service. This creates a conflict of interest.
- Agencies that ask you to dispute accurate information or ask you to lie on loan or credit card applications.
- Agencies that encourage you to find people who will co-sign loans for you or add you as an authorized user to their accounts. While this is certainly permissible, all parties involved should understand their rights and responsibilities.
- Agencies whose credit counselors aren’t certified or accredited by an outside organization.
Having a good credit score is key to getting low-rate business financing. It’s definitely possible to raise a bad credit score, but it takes time and patience. The first step is to fix errors on your credit report. Then you can take other steps, such as getting current on loan payments and paying off credit card debt. If you need a helping hand, there are several types of agencies that can help you better manage your finances and improve your credit score over time, but be wary of agencies that charge high fees or promise quick fixes.