Your Personal Credit Score. Why Is It Important and How Can You Improve It?
Your personal credit score is important for many reasons. In regards to your business, your personal credit score impacts your ability to qualify for loans and lines of credit, gain financing for necessary business equipment or even rent a space from which you run your business.
In the United States, there are a few major credit reporting bureaus, namely Equifax, TransUnion, and Experian. These bureaus collect information (both bad and good) from your creditors and typically use a scoring system developed by the Fair Isaac Corporation (FICO) to calculate a score based on the information. Oftentimes, the bureaus will also report a Vantage Score. It is normal that the different credit bureaus may report different credit scores due to the fact that not all creditors report to all bureaus so the information may be slightly different with each credit bureau. Keep in mind that reported information can stay on your report for up to seven years.
The FICO scoring system ranges from 300 to 850. A score over 700 is considered good while a score over 750 is considered excellent. The better your score, the more likely you are to qualify for credit with a reputable lender and the cheaper it will be for you to borrow those funds.
There are various factors considered in the algorithm which generates your credit score, including total number of accounts, hard credit inquiries and length of credit history. All factors though are not weighted equally. When considering what will bring you the most bang for your buck in improving your credit score, you should focus on payment history and credit card utilization ratio. These two factors alone can represent up to 70% of your overall credit score. This makes sense as lenders want to see that you are someone who pays their bills on time and is not overextended with debt.
What can you do?
Check your credit report. There are various websites, such as annualcreditreport.com, which will provide you with a free copy of your credit report. If there are errors, dispute them with the credit bureaus. It is also worthwhile to sign up for a service which allows you to check your credit on a regular basis and which makes recommendations for individualized solutions. Credit Karma is one such free service.
If you are behind on payments, bring them current as soon as possible and then pay on time, every time. You may want to set reminders or use auto bill pay resources available through your bank to ensure timely payment. Even though late payments will stay on your report for seven years, the older they are, the less effect that they will have.
Analyze your debt. You should aim to have your credit utilization ratio at 30% or less, preferably less. Focus on paying off debt and keeping credit card balances low. Don’t apply for new credit if you don’t need it. It might seem like a good idea to increase your overall credit limit but new credit will generally come with a hard inquiry on your credit report, which can impact your score negatively.