Strategies for Strengthening Your Business Credit Score

You probably already know that a good personal credit score is an important thing for a person to have. Whether taking out a loan or renting an apartment, more things are possible if you have good credit on your side. But if you are an entrepreneur, it is equally important to have good business credit, independent from your personal credit score.

Why do you need business credit?

If you started your own business, you most likely got it off the ground with your own money. Why, then, should you separate your business and personal finances?

First, it’s more secure. If your business fails, you don’t want that failure to damage your personal credits. And if your business is sued, you don’t want to risk losing your personal assets in court.

Second, having business expresses separate makes it easier for you to make the appropriate tax deductions.

Third, a business can access more credit than a person can: ten to a hundred times more. This is useful for two reasons. First, businesses often need that higher ceiling, because they must work with larger sums of money than the average person. Second, even if your business does not require such sums, more wiggle room is better. Experts recommend that companies try to keep their credit utilization ratio under 30% of the credit made available to them. If more credit is made available, this is naturally easier to do.

How do you improve business credit?

Business credit can be formed and improved in many the same ways as personal credit. This includes obtaining a company credit card, paying bills on time, and staying up-to-date on how your company is scoring.

Like personal credit cards, business credit cards are easy to find and apply for. However, it is important to compare the available choices, and make sure that you are picking the best option for your company. Look for low rates, as well as high spending limits. Again, a limit that seems unnecessarily high will play to your advantage, as staying within 30% of that limit will help your credit in the long run.

As with personal credit, it is unquestionably important to pay bills on time. In addition to avoiding fees, failure to pay in a timely manner will damage your credit. if you are worried about remembering to pay on time, you can set up your account to collect payment automatically.

Lastly, you need to understand how your credit is determined. Credit scores are compiled through credit bureaus. When you go for a loan, or rent a space, or do anything else that requires credit, lenders will receive your score from one of these companies. You don’t know which one—it depends on the lender—and with personal credit, it doesn’t really matter, because personal credit bureaus all do their calculations the same general way. However, unfortunately, business credit bureaus are not so uniform. As a result, different bureaus will come up with different scores. So that you are not caught off-guard, and so that you can update information as need be, keep an eye on your business credit scores according to multiple bureaus, not just one.

In conclusion

Separating your business and personal credit will both benefit your business and protect your personal finances from going under if your business fails. Establishing business credit is similar to establishing personal credit, but note the few differences there are—for instance, the higher ceilings and the less uniform scoring methods. Being aware of how business credit works will help you grow your business in a smart, financially sustainable way.

Freddie Mac and Fannie Mae: Analyzing the Bill That Would Put an End to the FICO Monopoly

Recently, three senators Ed Royce (R-Calif), Kyrsten Sinema (D-AZ), and Terri Sewell (D-AL) from the House have introduced a new piece of legislation that would basically allow the government sponsored enterprise to keep alternative credit score models in mind. In other words, this would put pressure to use alternatives other than the FICO credit score model the GSE’s use at the moment.

Sewell had said in a statement that she finds this fight critical partially because she strongly believes that these credit score models are not only outdated, but also fail to take certain factors into account (i.e., if borrowers were able to pay their rent on time). Essentially, the reps want to move away from the Fico’s monopoly credit score models.

In turn, this legislation would open the market for responsible, qualified potential homeowners who are actually qualified to buy a home. This could be a step in the right direction in terms of rectifying the issue in an effective way and allowing homeownership to become more of an attainable dream for different Americans across the country.

If this would pass, it would allow for more competition and open opportunities to other credit score companies that currently are unable to change the status quo. One company that is excited for the possible change is Vantagescore Solutions, which would definitely benefit from the increased market competition.

In a statement, the CEO of Vantagescore Solutions Barrett Burns said that “From the beginning our ask has always been to allow lenders to choose among today’s more predictive models that score more creditworthy consumers without lowering credit standards.”

 

Tips on How to Boost Your Credit Score

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Your credit score is like a report card on how you manage your finances, and just as it is important to have A’s and B’s on your report card, it’s important to have a good credit score. Not only can your score play a role in whether you can get a loan, it also may affect what you pay for insurance and the amount of deposit you have to put down on an apartment. If your credit score is lower than it should be, you can follow these tips to give it a boost.

Bring past-due accounts current

One of the best and easiest ways to boost your credit score is to get current on any past-due accounts. If you are applying for a mortgage to check with the mortgage company first before paying any collections or charge offs. These accounts may not need to be paid before the loan is done and paying off old collections or charge offs will bring your scores down temporarily, or until they show some history of being paid and could cause a problem with getting the loan.

Accounts that haven’t been paid on time can greatly reduce your credit score, because your payment history accounts for more than one-third of your total score. If you have any accounts that are in collections, pay those off first and make sure the collections agency notifies that credit bureaus that you are now current. Then concentrate on bringing other accounts up to current status. One key thing to focus on, however, is that you want to make sure you don’t let any new accounts become past due while you are catching up on accounts that are already behind.

Pay down debt

Once you have worked to get all your credit accounts current, your next focus should be on paying down debt. The amount you owe makes up 30 percent of your credit score, and if you owe a lot relative to how much credit you have available, then it will affect your score. A general rule of thumb is your debt should be less than 30 percent of the amount of credit you have available. So if you have $10,000 worth of available credit, you should owe less than $3,000. This rule applies only to revolving credit accounts like credit cards, not to installment loans such as a car loan.

Don’t close accounts

If you pay off an account, you may be tempted to close it, but that can hurt your score, especially if the account has been open for a long time. The length of your credit history accounts for 15 percent of your credit score, so if you cancel accounts you have had for a long time, it can shorten your history and hurt your score. Keeping accounts open, even after they are paid off, will help boost your score.

Don’t open new accounts

The more credit cards you have, the more it can lower your score, especially if you have opened a lot of accounts recently. Opening a lot of accounts in a short time looks risky to lenders and can hurt your score. Doing so also can shorten your credit history, which can reduce your score as well.

Determining Tenant Worthiness

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As a landlord, deciding who will be a good tenant for your property can prove to be and extremely challenging process. There are several key factors in making a tenant decision, but the most important one is determining whether or not the potential renter will be able to consistently pay their rent in a timely fashion.  There are several determination factors to consider when making this final decision (the most important one being their credit score).

 

What is your applicant’s age?

FICO scores vary based on the consumer’s age. When you’re considering younger applicants as renters, it’s important to keep in mind that they may not have enough credit history to possess a higher score.

 

What has impacted the applicant’s score?

Take the time to review the credit report. Some factors that might have negatively impacted a score might not be relevant to you as a landlord (ie: the number of credit inquiries they’ve had.)

 

Is there a guarantor willing to cosign?

Maybe you feel the applicant would be a great fit but their previous credit history isn’t ideal.  Considering a cosigner for the lease, which will provide a backup source of payment if your tenant does not follow through on their payments.

 

Whether you’re a landlord looking to rent your property, or a tenant searching for your next apartment, a person’s credit score is vital to any rental agreement. A landlord will likely infer the worthiness of a potential tenant through their credit score, which shows someone’s financial stability. Ideally, as stated in homeguides.com, a FICO score of 660 and up is the optimal credit score for a potential tenant to a property but can vary based on landlord preference. In a situation where an applicant has poor credit, a landlord might suggest a month to month lease agreement, a higher rental payment, or automatic payments.

 

What is a Credit Score?

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Used as a basis in determination for loans, credit cards and mortgages, credit scores play a vital role in any person’s credentials. Your credit score can literally mean the difference between being approved for a mortgage on your first home and being denied. Credit scores also plays a significant part in determining interest rates.

Your credit score is a generated mathematical algorithm that uses information from your credit report, as depicted on bankrate.com. Although there are various credit score models, most lenders use an applicant’s FICO score to determine their eligibility. According to FICO, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”

There are 5 primary aspects in determining someone’s credit score: payment history, debts owed, length of credit history, new credit, and types of credit used. Each metric is weighted in different percentages against your score, with payment history and debts owed making up for more than half of your total score. Whether you are new to building credit or have a substantial number of years with credit also works as a factor in your credit score. Those who are new to credit have a different formula used than those who are not. Consumers with similar credit profiles have a formula designed for their category.

Although some lenders may have their own spectrum of what  “a good credit score” is, creditkarma.com suggest a good score is anywhere between 700 and 850. Knowing your credit score is a crucial aspect in planning your financial success. Prior to applying for credit you should always review your score and know where you stand. There are various sites you can visit that specialize in managing your credit score. By doing so you have the opportunity to build your score and make yourself a more favorable applicant, thus setting yourself up for future financial success.