For many lenders, your personal credit has a major impact on your ability to get a business loan. So while you want to make sure your business credit stays as high as possible, it’s important to keep your personal credit score in top shape.
Here are 4 steps to maximizing your personal credit score, followed by 4 mistakes to avoid at all costs.
To Maximize Your Score:
1. Keep your balances at least 20% below your credit limits.
The first way to improve your credit score is to keep your credit balances well below their limits. You don’t want to seem like you’re towing the line between making payments and being late, so try to keep your outstanding balances at least 20% below the credit limits afforded to you.
2. Maintain a variety of credit types.
If you’re looking to improve your credit score, you should take a look at how many different forms of credit you maintain. If you have credit cards, lines of credit, mortgage loans and more, all with consistent payment histories and no late marks, lenders and banks will be more likely to trust you.
3. Don’t open new forms of credit at the same time.
You are going to want different forms of credit on your records — but you shouldn’t open up all those credit accounts at the same time, either. According to a recent report from MasterCard, those who open several credit accounts in a short period of time are considered “high-risk” by many lenders and banks. If you don’t have a heartily established credit history and you open multiple forms of new credit at once, you’ll be doing significant damage to your credit reputation — so wait a few months in between each credit card and line of credit that you set up.
4. Keep up with your payments!
Lastly, there’s one easy way to maintain a high credit score: keep your payment history consistent and clean. If you’re constantly making late payments, you’ll see your credit score dip dramatically as a result — even if you’ve always made the payments eventually. So keep an eye on due dates, and make sure that none of them pass without you making the necessary payment.
Mistakes to Avoid:
1. Making a late payment
This one should be obvious: if you make a late payment on anything, be it a creditcard debt, a mortgage, a business expense or something else entirely, then your credit score is going to take a significant hit as a result. Payment history makes up roughly 35 percent of a FICO credit score — so keeping that history perfectly clean should be your top priority.
2. Closing a credit card (unless necessary)
It may seem like closing a credit card has no negative connotations, but some financial consultants suggest that closing a credit card can damage your credit score — because it lowers the overall amount of credit available to you. In fact, one individual suggested to CNN that card users should even keep cards open and simply charge an item to them once a month — even a sandwich! — rather than actually close the accounts.
3. Continually going over limits on one or more credit cards
When you reach your credit limits on your cards, you’re sending a message to potential investors, and it’s not a good one. This, in theory (though not always in practice) shows that you can’t deal with credit well, and are often bumping up against your limits and capabilities. Perhaps even worse, it can also damage your debt-to-credit ratio, which is a big part of determining your credit score.
4. Co-signing on loans is also never advised
Here’s another trap you want to stay away from: don’t co-sign on loans, especially if they’re not related to your own business. You never want to leave the state and quality of your credit in the hands of another individual or entrepreneur. So no matter how many times — or how vehemently — you’re asked to co-sign on a friend or family member’s loan or home, avoid doing so at all costs. Even CNN notes that “co-signing is a disaster waiting to happen,” and you don’t want it to happen to you.
Your personal credit score is extremely important. It is often the most important factor in determining your initial access to loans and other forms of financing support, especially if your business has yet to build up a credit history. Keep it high and avoid these pitfalls to ensure access to capital for you and your business in the future.