Improving Your Credit Score

By Bizbox

More and more small business owners are going to have start using credit cards to take out loans on their business' behalves. No one's saying this is an ideal situation: credit cards tend to have high interest rates, with both rates and limits that can be changed almost immediately and almost entirely at the issuer's whim. In a perfect world, you would be able to secure credit through other means. But...well, you know. Now is not the time to expect the bank to offer you a new line of credit.

Instead, you should at the least be prepared to start borrowing with your credit card, and everything about that will be easier if you have a good credit score. The New York Times runs a good credit score primer, and though it's targeted at consumers, there are some great lessons for entrepreneurs who may be using their personal cards to secure money for their businesses. In most cases, it's easier than you'd think, and the payoff, in the form of lower rates, higher limits, and general ease, could be significant.

A median credit score--the FICO Score, generated by Fair Isaac--is 720. Especially in the current environment, you should be aiming for a bit higher: at least 750. Get your free annual report from one of the three consumer credit rating bureaus: Equifax, Experian, and TransUnion. What's next?

Check accuracy. Doesn't get more basic than this. How silly would it be if you were subject to confiscatory interest rates because someone somewhere made an error that wound up unfairly lowering your credit rating? Make sure all the bank accounts listed on your credit reports as yours are yours. Next, look at the tally of things that count against you--late payments, for example--and make sure they are accurate. In all cases, when you see something, say something--report it immediately to one of the bureaus, which are required to respond within a month.

Game the debt system. Little idiosyncrasies of the rating process can undeservedly damn you. For example, the system considers your end-of-the-month credit balance prior to payment--even if you pay in full and on time--and places some emphasis on how near you are to your limit. The Times uses this example: if you have one credit card with a $5,000 limit and put $4,000 a month, that is worse for your score than having two $5,000-limit cards, each of which has $2,000 on it. This is a stupid inefficiency, but it's how it works. Generally, know exactly what the bureaus are looking for, and do everything to give them what they want.

Preventive measures. One credit score trap the Times cites are retail cards, those store-specific credit cards that you can usually initiate in exchange for receiving some sort of discount at the store in question. These are bad news: it doesn't look good if you've opened up a bunch of new credit cards recently, and these cards' lower limits mean you're more likely to approach them, which, as we've said, the bureaus don't like. More broadly, and most importantly: pay your bills on time. Your history here represents 35% of your score at least. It's so simple. Just do it.

Of course, the real lesson, as the Times piece makes clear, is to use cash wherever possible right now. Since your consumer credit card is now doing double duty for your small business, that means trying to keep most of your personal purchases in cash, if you can manage it.

Comments (2)

October 13, 2008 9:47 AM