Your personal credit is something that you should prioritize, as it can provide you with leverage needed to secure the funding and credit lines to scale your business to new heights, whether it’s for inventory or expansion capital. It can also help you lock in traditional funding in the event that an acquisition play presents itself.
When it comes down to it, having a rock solid personal credit profile and high credit scores gives you a major advantage when seeking business credit, regardless of the reason.
In today’s lending market, the majority of business loans, credit lines and credit cards will require a personal guarantee, which takes your personal credit history into consideration during the review process and contributes to an approval or denial.
This also holds you personally liable in the event that you default or the business goes under. You have to really weigh the risk factors when determining whether or not to take on business debt that requires a PG (personal guarantee).
Non-recourse business credit is very rare these days. Some lenders will extend credit lines without a PG if there is a long history or if the business has sizable assets to use rather than a personal guarantee.
If your personal credit scores are low, it can prevent you from securing the business credit you need. Your credit scores from Trans Union, Equifax and Experian, the three major consumer credit reporting agencies, are very important. The higher your score (which can be between 300 and 850) the more borrowing power you posses.
There are a lot of contributing factors that all play a role in determining your FICO score, but there are a few things you can do to quickly increase your score by 100 points. Doing this before you apply for credit lines, business credit cards or loans, can dramatically increase the odds of securing the funding you need.
Have family members add you to aged credit card accounts as an authorized user.
You can quickly bump your credit scores up simply by being added as an authorized user to major credit cards. If they card reports its authorized users to the credit bureaus it will pull that card’s history, in terms of payments and limit, and inject it into your credit profiles. So, not only do you get the score increase, but it also has a positive impact on your account history, average age of accounts, and your overall credit utilization ratio.
This is the easiest way to see an instant score increase, and it can be significant, but you have to make sure you are being added to an account that is going to benefit you. It’s important to understand that if a card has missed payments in the past, that negative history will also reflect on your credit reports. Additionally, if the card has a low limit or it’s always being maxed out and carrying a high balance, that too, can have a negative impact on your credit scores.
You have to really look into a card’s history before being added as an authorized user. It’s best to only approach close family members for this strategy. First, you need to be able to openly discuss the details of the card to determine whether or not being an authorized user will benefit you, and second, you are going to need to give the card holder your social security number for them to add you, so it needs to be an individual you completely trust.
Never close old accounts — even if they are not being used.
One very common credit mistake is closing out old credit card accounts that are not being used or closing several cards and using just one. Anytime you close an account, especially if it has a long history or a large limit, will actually lower your average age of accounts and lower your available credit. Both of these have a negative impact on your score and credit profile.
If you have some old credit card accounts make sure you keep them active, simply by putting a small purchase on each one every month. A tank of gas, a morning coffee, lunch, etc. You don’t have to go crazy, but keeping them active and open is the easiest way to positively influence your credit scores.
Don’t make the mistake of applying for several new credit cards at the same time thinking that will help your score. It will actually do the complete opposite. While you may rack up a larger overall available credit amount, your average age of accounts will tank, and all of the rapid inquiries will also ding your scores.
Prioritize paying your bills on time over eating and other necessities.
If you are serious about preserving a strong credit profile and high credit scores then you need to make on-time payments your priority. If you have to chose between making a credit card payment on-time or eating dinner, then make the payment and eat a peanut butter and jelly sandwich. A single missed payment will put you in a major hole. Not only will your score take a major beating, as a single late payment can drop your scores anywhere from 90 to 110 points, but that one late payment will make you automatically disqualified from receiving any credit approvals in the near future. Most lenders will automatically reject applications with recent late payments on the credit profile, ranging from 12 to 24 months.
So, whether it’s a $4,000 mortgage payment, $600 car loan, or a $50 minimum payment on a credit card, do whatever it takes to make it your top priority, and ensure all of your bills are paid on time every single month.
If you need to pick up a side hustle to get your bills paid on time, then do it. Your personal credit is a major business asset, so protect it at all costs.
Pay down your balances so you show a low credit utilization ratio.
Your overall credit utilization ratio plays a major role in your credit scores, and carrying a high balance across your cards will lower your score. One of the easiest ways to increase your credit score is by paying all of your cards down until you are below 20 percent utilization. So, let’s assume you have a total of five credit cards, and each has a $20,000 limit. That would give you a grand total of $100,000 in available credit. You would want to make sure that you never have more than $20,000 reporting across all of your cards. Anything higher will lower your score.
Also, when it comes time to apply for credit, you want to consider paying them all off if you can. Anytime you show little to no debt your risk profile becomes more attractive to a potential lender.
Now, a quick little trick that can help you lower your credit utilization without making any payments is simply asking the credit card companies to increase your limits. Now, you will want to only entertain this if the lender will evaluate you for a limit increase without performing a hard inquiry, which will ding your credit score. When making this request, ask them if it’s a soft inquiry. If not, don’t do it.
Use a credit monitoring service and file disputes if necessary.
There are several benefits of using a credit monitoring service, but not all of them have the best features. First, you want to make sure that the service you use pulls data, scores and reports from the three major credit bureaus: Trans Union, Experian and Equifax. Some will only give you one score. You want to make sure you are receiving updates and data from all three. Second, you want to use a service that lets you pull a fresh report at least monthly, containing data and scores from all three credit agencies.
The notifications are great to receive and they can help you stay on top of your credit reports, keeping you aware of any changes. But, the key is to pull a fresh report every 30-days and manually audit your credit reports, looking for errors. If you do find errors and wrong information, you will want to dispute it as quickly as possible. The credit bureaus must reply to written disputes within 30-days, so it’s important that you document everything.
Keep copies and send everything, in writing, certified mail, so you can track when it was received. Avoid filing disputes electronically with the credit bureaus — always opt to send written communication. The credit bureaus are known to not follow the law, when it comes to properly investigating disputes, so I would also suggest you leverage the power of the Consumer Financial Protection Bureau. You can file complaints with them as well to help clear up incorrect information on your credit reports.