WHAT IS A CREDIT SCORE?
A credit score is like a financial risk and responsibility rating for an individual or company. It is used for determining your creditworthiness, meaning how likely you are to go into debt or not. From a business perspective, credit scores determine how likely you are to fill your financial obligation. Therefore, banks use it to decide whether or not to approve a loan or credit card, or what type of credit terms for which you can be approved.
A personal credit score is a three-digit number based on an individual’s creditworthiness. There are three main credit bureaus—Equifax, Experian, and TransUnion— that analyze your financial history and activity to determine your personal credit score.
FICO, previously known as the Fair Isaac Corporation, is the most widely used method used to calculate personal credit scores. However, the three major personal credit bureaus mentioned before also created a method known as VantageScore. Here are the general ranges for each method:
- 300-579 = Very Poor
- 580-669 = Fair
- 670-739 = Good
- 740-799 = Very good
- 800-850 = Exceptional
- 300-549 = Very Poor
- 550-659 = Poor
- 650-699 = Fair
- 700-749 = Good
- 750-850 = Excellent
Business credit scores are different and usually run on a 0 to 100 scale. The three main bureaus that determine a business’s credit score are Dun & Bradstreet, Experian, and Equifax. Each bureau calculates scores differently, and depending on which one you use, poor to fair may vary. However, this is what you can expect from each of the three main business credit bureaus:
Dunbar & Bradstreet
- 0-49 = Poor
- 50-79 = Fair
- 80-100 = Good
- 0-49 = Poor
- 50-76 = Fair
- 77-100 = Good
- 0-49 = Poor
- 50-89 = Fair
- 90-100 = Good
WHAT GOES INTO A CREDIT SCORE?
Whether through FICO or through VantageScore, all credit bureaus generally use the same factors when determining credit scores, with some factors holding more weight. These are the most common and important factors weighed in calculating your credit score:
- Payment history for loans and credit cards (35%)
- How much debt you have (30%)
- Length of credit history (15%)
- Types of credit you have such as credit cards, loans, mortgages, etc. (10%)
- New credit/ Number of inquiries for your credit report (10%)
Other factors may include public records, such as for bankruptcy, and credit limits.
Typically, the factor with the most weight in determining your personal credit score is your payment history: how timely you are with your payments, whether you pay at least the minimum due each month if you have any late payments, and how often you are late with payments.
As for business credit scores, each of the top reporting bureaus has its own method for calculating business credit. The main factors include:
- Accounts under the company name
- How you pay your bills
- How much debt you carry
- The industry you’re in
WHY YOU HAVE MULTIPLE CREDIT SCORES
Not all lenders report to all credit bureaus. Some lenders may also update the bureaus at different times. It’s possible that some lenders only report to one or two bureaus or even none at all. Lenders may also have different scoring methods, or use industry-specific scoring methods. For example, an auto lender may use a different method than a mortgage lender. Because of this, you may have multiple credit scores.
So what does this mean for cardholders?
Banks also have their own internal scoring system. Therefore, if you’re looking for an increase in a credit line or an upgrade in a card, they will look at your activity with the bank to determine whether an increase or upgrade is available to you, and how much of an increase is available to you. The longer you are with a bank or credit card company, the more you are able to ask for increases to your credit limit. Together with your credit score provided by the bureaus, creditors have a wider view of an individual’s or business’ creditworthiness.
Also, keep in mind that the cards you have and how many you have can impact your credit. Adding a new card can increase your credit while closing an old account could hurt your credit. It’s better to have an old inactive account because lenders look at the age of your accounts. By getting rid of old accounts you reduce the total age of your accounts. Closing an old account can also take available credit off the table which can have an immediate impact on your score.
PERSONAL CREDIT SCORES VS. BUSINESS CREDIT SCORES
Your personal credit scores and business credit scores are independent of each other, and it’s important to keep them separate to protect your personal assets should your business fail or experience any hardships. If someone sues your company for any reason, you don’t want them to be able to claim your personal assets. Furthermore, your business credit is public information, so you don’t want your personal credit to affect it if your personal credit is not up to par. You can also have separate business credit for each separate entity you may have.
Let’s break down the differences between your personal credit score and your business credit score.
PERSONAL CREDIT SCORE
- Linked to your Social Security Number (SSN)
- More legal protections
- Measures your ability to pay back debt
- Main credit bureaus: Equifax, Experian, and TransUnion
- Score range: 300 to 850
- Can check for free every year
- Private information available only to yourself and a few other authorized parties
Tips for boosting your credit score:
- Automate credit payments.
- Aim for a credit utilization rate of 30% (i.e., if your limit is $1,000 you’ll want to keep your spend under $300).
- Don’t close old accounts.
- Don’t open too many new accounts.
- Adjust payment due dates if needed—except for mortgages, this should be an easy phone call.
- Request credit limit increases every year.
- Get your free credit report every 12 months and check it for errors.
BUSINESS CREDIT SCORE
- Linked to your company’s EIN number
- Fewer legal protections
- Measures your business’ ability to meet its own financial obligations
- Main credit bureaus: Equifax, Experian, and Dun & Bradstreet
- Score range: 0 to 100
- Cannot complete business transactions without business credit
- Public information
Building good business credit matters for growing your business, because it allows you to secure financing, increase the value of your business, get better rates on insurance, and protect your personal credit.
Here is what you can do to establish your business credit:
- Get incorporated by creating a legal entity for your business.
- Open a business checking account.
- Apply for and use a business credit card.
- Ask for credit terms from your vendors—even if small and short.
- Apply for small loans.
- Make timely payments.
- Register with the business credit bureaus.
Once you have taken these steps, it’s important to take care of your business credit the same way you do your personal credit. Pay your bills on time, avoid delinquency, and keep your utilization rate under 30%. Be sure to check your business credit score at least annually, if not quarterly or bi-annually, because there may be mistakes. If there are any mistakes, you’ll want to get them corrected.
WHAT YOUR PERSONAL CREDIT SCORE MEANS FOR YOUR BUSINESS
If you’re starting a business, or are a struggling entrepreneur, your personal credit impacts your business credit more than the other way around. Banks and lenders will generally see your personal credit and business credit as closely linked.
Here are some of the ways your personal credit score may impact your business:
- Many lenders consider personal credit when reviewing your business loan application.
- A small business loan may require a personal guarantee.
- If you are starting a business and applying for a business credit card the creditor may ask for a credit check using your personal credit score and history.
- If you are trying to lease office space, the landlord may ask for a personal credit check.
- Personal credit can impact suppliers, because suppliers may look at personal credit and debts to determine how much credit to extend to you.
Having good personal credit is important for new or struggling entrepreneurs because much of your business operations will be dependent on your personal credit score. More and more it is becoming common for business credit to rely on a blend of information from a business owner’s personal credit.
The bottom line is that to help your business, it is important to maintain good personal credit, especially for entrepreneurs and small businesses.
How To Get Your Credit Scores
Now that you know what a credit score is, how it is calculated, and the effects your personal and business credit can have on your business, it is important that you know how to find your score.
As a business owner, you’ll want to monitor both your personal and business credit scores so you’ll be prepared for how they will impact what you can qualify for. While there are several different ways that you can check your business and personal credit scores, using free options, when available, is never a bad idea.
To check your personal credit scores, annualcreditreport.com is a federally-authorized website that provides free access to your scores from Experian, TransUnion, and Equifax.
If you’re looking for your business credit scores, nav.com offers useful free and premium options.
In addition to these two great websites, check out these three apps that can help you keep track of your credit information for free:
- Credit Karma
- Credit Sesame
- CreditWise by Capital One
All three of these websites allow you to check your credit scores for free without hurting your credit score.
You can also order credit reports and subscribe to other credit-related services at a cost from the different reporting agencies, here’s where to start with each:
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