As a small-business owner, you might not think that your personal credit score is important. However, you may need a good personal credit score if you want to secure competitive funds to pursue business-building strategies. In today’s high-interest-rate environment, having good credit may be even more important when it comes to obtaining loans at favorable terms.
Find out more about why you need a strong personal credit profile and some steps that you may be able to take to improve your scores.
What is a personal credit score?
Your personal credit score is a number that evaluates your creditworthiness based on your credit history. Once you accept your first job or apply for a credit card, a personal credit profile is started with the three credit reporting agencies: Equifax, Experian, and TransUnion. Eventually, this report becomes an indicator of your ability to pay back a debt. Credit scores range from 300 to 850 and will vary slightly from one agency to another. The higher the score, the more financially trustworthy a person is typically considered to be.
Personal credit score calculation
Five main factors are evaluated when calculating a credit score:
- Payment history: 35% Shows if obligations are paid on time
- Total amount owed: 30% This takes into account the percentage of credit available vs. credit currently being used (Also known as credit utilization)
- Length of credit history: 15% Longer credit histories are usually considered less risky, as there is more data to determine payment history.
- Types of credit: 10% Shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards.
- New credit: 10% Factors in how many new accounts have been applied for recently that resulted in credit inquiries and when the most recent account was opened.
Why is your personal credit score important?
Your quality of life may be impacted by your personal credit score. Establishing credit responsibly is almost always required to reach financial goals. Healthy credit allows you to:
- Purchase a home. You need good credit to get approved for a home mortgage.
- Rent a home. The first thing property owners want to know about a potential tenant is that they have proven that they make regular rent payments. Your credit score usually gives a good idea of how responsible you are with your financial obligations.
- Get favorable insurance rates. Credit-based insurance scores rely on credit history as one factor to determine premiums for different lines of insurance, like auto and home.
- Fund a small business. If unable to bootstrap (use personal funds), many entrepreneurs use credit cards or other loan products to start and help run a small business. If you have poor credit, it’s very difficult to secure low-cost funds. Funds with high interest rates and short payback terms may crunch your cash flow and do more harm than good.
Steps to improve your personal credit score
The good news is that your personal credit report isn't set in stone. Your numbers may go up or down depending on the credit strategies you use. Here are some steps to take that may help improve your numbers.
1) Monitor your score closely: Order your credit report from each of the three reporting agencies linked above. If you determine that there is an error, work to resolve it quickly.
2) Keep an eye on your credit usage: One major factor of your credit score is the revolving credit you have available versus how much you're actually using. The smaller that percentage is, the better it is for your credit rating. According to financial professionals, the optimum is 30% or lower. The best strategy here is to pay down your balances and keep your balances low.
3) Pay bills on time: Delinquent payments and collections have a major negative impact on a credit score. Set up automatic payments to make sure you’re never late. You’ll also avoid expensive late fees.
4) Don’t apply for or open new credit accounts: You do need a good credit mix, but opening new accounts probably won’t improve your score, and an inquiry may cause your numbers to drop.
5) Pay off debt instead of just moving it around: Paying off debt may prove more effective than just moving it around. When you have less debt, your credit utilization decreases while your available credit increases.
6) Don’t close unused cards: Closing credit cards may be a good idea in some cases, but it may also have a negative impact on your score.
7) Be patient: There’s no quick fix to raise your personal credit scores. Craft a plan to improve your personal credit scores and stick with it.
Use free credit monitoring tools to stay informed
Many banks, credit card issuers, and personal finance apps now offer free credit score tracking and alerts that notify you of significant changes to your credit profile. While these tools don't always display every scoring model used by lenders, they may help you spot trends, detect potential identity theft, and identify issues before they affect a loan application.
In addition to monitoring your score, review your full credit reports on a regular basis to check for inaccurate information, unfamiliar accounts, or signs of fraud. Catching and correcting errors early may prevent unnecessary delays when applying for financing and help ensure that your credit profile accurately reflects your financial history.
The bottom line
Does a business loan affect your credit score? SBA loans are the gold standard for a small business owner with low rates, long terms and low payments. In order to qualify, you may want to keep an eye on your personal credit and work to get it in the required range.
FAQs
What factors affect my personal credit score?
Although credit scoring models vary, most consider similar factors. Your payment history typically has the greatest impact, followed by the amount of debt you owe compared to your available credit (known as credit utilization). Other factors include the length of your credit history, the mix of credit accounts you manage, and how often you apply for new credit. Making on-time payments consistently and keeping credit card balances low may be two of the most effective ways to maintain a healthy credit score.
How can I build my credit score from scratch?
If you're just starting to build credit, begin by opening an account that reports to the major credit bureaus, such as a secured credit card or a credit-builder loan. Use the account responsibly by making purchases that you are able to afford to repay and paying every bill on time. Becoming an authorized user on a trusted family member's credit card may also help establish credit history in some cases. Building good credit takes time, but consistent, responsible habits may produce steady progress.
What are the best ways to improve a low credit score?
Improving your credit score usually starts with addressing the factors that have the biggest impact. Make all payments on time, reduce outstanding credit card balances to lower your credit utilization, and avoid applying for multiple new credit accounts in a short period. It's also important to review your credit reports for errors and dispute any inaccurate information. While there's no quick fix, consistent positive financial behavior often leads to gradual improvement.
How often should I check my credit report and score?
Reviewing your credit reports at least once a year is a good practice, but checking them more frequently may help you catch errors, identify potential fraud, and monitor your progress if you're working to improve your credit. Many banks, credit card issuers, and financial apps now provide free credit score updates, making it easier to keep an eye on your credit throughout the year.
How can I maintain a good credit score over time?
Maintaining strong credit comes down to consistency. Continue making payments on time, keep credit card balances well below your available limits, avoid closing older accounts unless necessary, and apply for new credit only when it serves a clear financial purpose. Regularly reviewing your credit reports and monitoring your accounts for unusual activity may also help protect the score you've worked to build.
Why does my personal credit score matter when applying for loans?
Your personal credit score helps lenders evaluate how you've managed debt in the past and may influence both loan approval decisions and the terms you're offered. A stronger credit score may improve your chances of qualifying for financing and may help you secure lower interest rates or more favorable repayment terms. For many small business owners, especially those applying for SBA loans or newer businesses without extensive business credit, personal credit remains an important part of the overall lending decision.
