Why is Having a High Credit Score Important?
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If you are reading this, you are an entrepreneur and business owner who knows the value of good credit. But if you don’t, here’s why having a high credit score is essential.
Chances are you’ve borrowed money before, for yourself in the form of an auto loan or lease or a mortgage, or for your business. Lenders base the interest rate they charge on the amount of risk you or your business poses as a borrower – in other words, the interest rate is based on the likelihood of you defaulting on the loan. Your credit score is an expression of that risk, based on the history of your financial behavior.
This means that higher-risk individuals and businesses borrow money at higher interest rates than lower-risk individuals and businesses. Higher interest rates make it more expensive for those with a low credit score to borrow money than it is for those with a higher credit score.
Here are three quick tips on how to save money in interest charges by increasing your personal credit score, also known as a FICO score.
1. Pay All Bills In Full and On Time
Paying monthly bills in full and on time is the most important thing you can do to raise and preserve a higher credit score. What happens when you pay late? Late payments are reported to the credit agencies, which log them on your credit report. Your credit score will take a hit as a result.
If you are struggling to pay personal bills or business bills, contact the creditor. What all creditors have in common is the desire to get paid, and it is likely they will work with you to establish a payment plan that will achieve that and that you can afford.
As long as you pay according to the plan you negotiate, your creditors will not report late payments to the consumer credit agencies.
2. Personally Guarantee or Co-Sign Your Business Loans Only if You are Sure the Business Can Pay Them Back
This might not make sense, because when would a lender want a personal guarantee or co-signer? Usually when the business has no credit history or poor credit history – meaning, the business is at a higher risk for default.
If you personally guarantee or co-sign a business loan and then your business defaults on that loan, that will have a negative impact on your personal credit score.
You would think that the opposite would be true – that if your business repays the loan on time and in full, that will improve your credit score. On the contrary, commercial lenders generally do not report a well-performing business loan to consumer credit agencies as an obligation of the guarantor.
However, if you co-sign a business loan, the story changes. Each timely monthly payment your business makes will show up on your credit report and will improve your personal credit score.
The upshot – if you are sure the business will repay the loan, co-sign it and take personal advantage of your business’ credit-improving financial practices.
3. Avoid Using Personal Credit Cards to Fund Your Business.
Many small businesses use the owner’s personal credit cards, but again, if the monthly minimum (or more!) is not paid in full and on time, the financial behavior of your struggling business will have a negative impact on your personal credit score.
Establish your business credit by obtaining and regularly using a business premium credit card, even if it has a very low limit. Not only are you creating a positive credit history for your business, but you are saving money – those interest charges and annual fees are business expenses and therefore tax-deductible.
Ideally, you will want to keep your personal debts and expenses separate from the business’ debts and expenses. A great way to do this is to incorporate and have clearly-identified separate accounts and bills in your business’ name and in your name. This will help to preserve your good credit should the business struggle financially.
About the Author:
Veronica Baxter is a legal assistant and blogger in the Philadelphia area. She works frequently with David M. Offen, Esq., a busy Philadelphia bankruptcy lawyer.