How Credit Scores Work
A credit score is simply a number that’s designed to represent the likelihood that a person will repay a loan. Before the invention of credit scores, a lender would have to review and analyze an applicant’s entire credit history and someone would have to make a decision about his or her creditworthiness. Now, anyone who sees your credit score can quickly and easily determine your creditworthiness without any special skills, and without being affected by any personal biases.
Credit scores are created by using the data from an applicant’s credit report and running it through a formula that results in a number. With most credit scoring models, the number will be between 300 and 850, with higher numbers representing better credit and lower numbers for less creditworthiness.
And although the actual formulas used to create credit scores are not disclosed, there is some information about them available. For example, FICO says that their credit scores are composed of:
- 35% - Payment History
- 30% - Amounts Owed
- 15% - Length of Credit History
- 10% - Credit Mix
- 10% - New Credit
Once you receive your FICO credit score, it can be interpreted in the following way:
- 800 - 850 is Exceptional
- 740-799 is Very Good
- 670-739 is Good
- 580-669 is Fair
- 300-579- is Very Poor
Recommended: Read our guide, How Do I Find My Credit Score? for more information.
Choosing the Right Credit Card for Your Credit Score
You shouldn’t apply for a new small business credit card if you have little chance of being approved. At the same time, you don’t want to be using a credit card that’s designed for someone with a worse credit history than you have, as you’ll miss out on the superior features, benefits, and rates that you could have been using. So it’s important to find the right small business credit card for your credit score.
Unfortunately, that’s not always the easiest thing to do. Many credit card issuers will indicate what credit level is needed to qualify for their cards, but they won’t be too specific. For example, a card issuer might refer to “Excellent,” “Good,” or “Fair” credit required, without spelling out what that means with your FICO score. And since these terms may or may not match up with the previously stated definitions that FICO offers, it can be a challenge to figure out your chances of being approved for a particular small business credit card.
Generally, you’ll find that small business credit cards will fall into three categories. First, there are the premium cards that are designed for business owners with excellent credit. These include cards that offer rewards in the form of cash back, points, or miles. Typically, these cards will have an annual fee and will include all sorts of other benefits. Premium cards are the most common small business credit cards. And although they are designed for those with excellent credit, some may be available to applicants with slightly lower scores, sometimes called good credit.
Next are the cards that are clearly labeled for applicants with less than perfect credit, that’s sometimes called “good” or “fair.” As you might expect, these cards will have fewer features and benefits and it is unlikely that they’ll offer rewards for spending. You can also expect these cards to have higher interest rates than other small business credit cards designed for applicants with excellent credit. Nevertheless, these cards usually have no annual fee and can be a valuable method of payment for your small business.
Finally, there are some small business credit cards that are designed for applicants who have poor or bad credit. Typically, these are secured cards, which are different than standard, unsecured cards. A secured credit card requires you to make a refundable security deposit before you can open your account. The amount of your deposit determines the size of your credit line. Secured credit cards for small business use are rare, but they do exist.
Once the account is open, secured cards for small business owners work just like any other credit card. You can make charges normally, and you'll receive a monthly statement. You will still have to make a monthly payment, as the security deposit is only there in case of default. But with responsible use, many secured cardholders find that their credit scores have risen enough that they are able to transition to a standard, unsecured card after a year of use.
Recommended: Read our guide, How to Choose a Small Business Credit Card for more information.
Ways to Increase Your Chances of Qualifying for a Small Business Credit Card
If your credit score isn’t excellent, then you might want to take steps to improve the likelihood of being approved for the new small business credit card you want. Your first step should be to try to improve your credit score in the short term. With 30% of your FICO score being determined by the amounts you owe, the quickest way to see an improvement of your credit score is to pay off your existing balances.
Also note that even if you’re paying your statement balances in full every month, the amount on your balance is reported as debt. But if you pay off your credit card balances just before your statement closing date, then you’ll have very little, if any debt reported to the three major consumer credit bureaus. And if you’re paying off any long-term balances, then you should make sure to wait until the end of your statement period so that your new balance will be reported on your credit history, and reflected in your credit score.
Once you apply for a new small business credit card, there are some things that you can do to increase your chances of being approved. First, make sure to include all of your eligible income. This includes any investment income, government benefits, alimony, and child support payments. You can also include the income of your spouse or domestic partner, so long as you have a reasonable expectation of access to those funds for the purpose of repaying a loan.
If you haven’t received immediate approval for your application, your next step should be contacting the card issuer and speaking with a representative. Your credit score isn’t the only factor that card issuers consider when deciding on a small business credit card application. This is your time to explain your business and why you need a credit card for it. Surprisingly, much of this process can be manual, so what you say to the representative can make a difference.
Recommended: Read our guide, Can I Qualify For a Small Business Credit Card? for more information.
It can take a little work to figure out what cards you can get with your credit score, but it’s worth the effort. By applying for the best cards available to you, and managing them responsibly, you can utilize all the best features, benefits, and rewards that small business cards offer.
Recommended: Not sure which card you should pick? Check out our recommendations on the 4 Best Credit Cards for Building Business Credit