Both your personal and business credit scores matter in a number of ways. When you apply for a loan, financial institutions will check your credit scores and decide whether or not you’re creditworthy enough to repay the loan on time.
Your business credit score might look different based on which credit bureau (Equifax or TransUnion) you’re pulled it from. You must also keep in mind that personal and business credits differ in many ways; one of which is that they don’t follow the same range of numbers.
While there are many different business credit scoring models, there are 5 factors that affect your credit score all the same. Let’s take a closer look at each factor.
Your payment history is one of the most important credit-scoring factors. If you have on-time payments in your credit history, your credit score will subsequently increase. But missing or late payments can hurt your score significantly. With late payments, a 30-day has a lesser impact than a 60- or 90-day late payment.
But don’t worry. You just have to start making on-time payments and actively reduce the amount owed. This will make a huge difference in your business credit scores.
This is the second most important factor that affects your credit score. Credit utilization is the percentage that indicates how much of your available credit you are using. For instance, your credit limit is $1,500 and you have used $500 of it. Your credit utilization, in this case, is 33.3%. Here is an easy formula to follow:
Total Balance ÷ Total Credit Limit = Credit Utilization x 100 = %
$500 ÷ $1,500 = 0.33 x 100 = 33.3%
In Canada, you should aim to keep the CU number under 35 percent. If the number is more than that, it can potentially hurt your credit scores and ability to access financing. A low credit utilization shows that you’re a responsible spender and can manage your debt accordingly.
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Length of credit history
The longer you’ve had your credit account(s) open, the more it will help your credit score. At the same time, closing old accounts and opening new ones can shorten the length of your credit history and ultimately damage your credit scores. That’s why it’s a good idea to keep your old credit accounts open and use them occasionally. As long as it’s not costing you more than what you can get out of it.
It’s also good to keep in mind that closed accounts can stay on your credit reports for 7 to 10 years which can increase the age of your accounts during that period. But when the account drops off your credit reports, it can then hurt your scores. The older your account, the more significant negative impact will be.
Avoid applying for new credit unless you really need a new account. When you give out too many inquiries within a short amount of time, it might be seen as a sign of opening new credit accounts due to financial difficulties. This will make lenders question your motive when applying for a loan.
All creditors will review your credit scores and reports, and either does a hard or a soft credit check depending on your financial needs. A soft check is when creditors check your scores, which doesn’t affect your overall credit. But a hard check is when creditors check your credit before making a decision about lending you money. This can hurt your credit scores regardless of getting approved for a loan. If you’re new to credit, getting a hard check can affect your credit score negatively. It can even get worse if you have many hard credit checks within a short amount of time.
Credit types and mixes
A healthy credit report should have a balanced mix of different credit accounts and loan types. Having this mix will help improve your credit health than just having only one type, such as a credit card. This is just a minor factor. So you don’t need to go out of your way to take out a loan and pay interest just to have it added to your credit mix.
There are many different business credit scores out there, and you may not know which one your lender might use to consider your application. So it’s a good rule of thumb to fully understand the above factors that can affect your credit score the most, and take steps to improve the health of your credit across the board.
Are you ready to take your business to the next step? Find out if you’re eligible for a business loan today!