Most business loans require a personal guarantee, which is why it’s important to pay attention to your personal credit and make sure it is healthy.
Below are some tips that will help you maintain a healthy personal credit score, so you can spend more time focusing on the many tasks that accompany being a business owner.
- Understandinging what goes into a credit score
Similar to a business credit score, your personal credit score is calculated using several factors. Here are 4 common factors and tips on how to manage them:
- Credit card usage: This is how much of your total credit card limits you’re using. You can easily calculate your usage rate by dividing your total credit card balances by your total card limits. Best practices for this are generally to try and keep this figure under 30%. This is because the more credit you use, the more likely it may be that you can’t repay your debts. This could result in your credit score being lowered if your usage rate is too high.
- Payment history: It’s important to pay your bills on time, because just one or two late payments could negatively impact your score. A tip to ensure that you make payments on time is to can set up automatic payments, or sign up for monthly email or text reminders to pay your bill.
- Derogatory marks: These include any accounts in collections, bankruptcies, foreclosures and liens. Similar to late payments, derogatory marks can really damage your credit score, so try your best to avoid these by staying on top of your debt.
- Age of credit history: You should seriously consider all options before closing any accounts. The age of your credit history has an impact on your credit score. Depending on the credit model, this could be calculated by the average age of your open accounts (credit cards, mortgages, auto loans, etc.), the average age of your open and closed accounts, or just the age of your oldest account. Generally, the longer your credit history, the better.
- MONITOR YOUR CREDIT REPORT REGULARLY
Along with building a strong credit, you should also make a point to check your credit report regularly.
Your credit report is a record that will show you your credit history, including your accounts, credit inquiries, public records and collections.
By keeping an eye on your credit report, you can make sure these items are accurate. Your credit score is derived from the items on this report, so making sure everything on the report is accurate is important to make sure your credit score is accurate as well.
If there are errors, these could have a negative impact on your score. A lower score could lead to higher interest rates or make it difficult for you to get the credit you need, so be sure to follow your report regularly and make sure everything on there is in line.
- UNDERSTAND relationship between BUSINESS AND PERSONAL CREDIT
Business and personal credit scores are pretty similar because they are both calculated by assessing multiple credit factors including on-time payment history, credit usage rate, and past collections and/or bankruptcies.
If you’re a small-business owner, you may use personal credit to run your business, especially if you’re a sole proprietor. Your personal credit could be assessed when you apply for a business credit card, rent a business space, or take out a business loan.
The better your personal credit score, the better position you could be in to receive favorable interest rates & approval for credit products.
In some situations, you might have the option of choosing between using your business or personal credit.
For example, if you’re making a purchase for your business, you may have the option of using your business credit card or your personal credit card and being reimbursed for business expenses.
Generally, business credit limits tend to be higher than personal credit limits, so charging large purchases to your business credit card could result in a relatively lower usage rate, which can be better for your credit.
Separating business and personal credit could also help you manage your tax and business bills more easily.
The Bottom Line
As a small business owner, your personal credit is very important. It can have an impact on not just your personal financial life, but also your business.
By following a few simple steps to stay on top of your personal credit, you’ll better position yourself—and your business—for success.