Whether you are a business owner or a consumer, credit matters. That’s a fact. Good credit is a tool that opens up tons of financial opportunities.
Why is it important to have good credit?
When buying a house or a car, products or services, or when getting a business loan, good credit is vital. At the same time, credit carries a big responsibility. A credit report will be required the moment you apply for any kind of credit. In that report, you will find your credit score (FICO) and your credit history. Your credit report is a summary of how many accounts you are currently paying (credit cards, business loans, etc), how often you pay them, and how long you’ve been paying them.
What is a good credit score? According to experts, a credit score of 720+ is recommended to have access to the best credit offers. If your credit score is less than 720, do not be discouraged. There are plenty of ways you can repair and strengthen your credit so that you have access to capital for your business. However, if your credit score is really low, we recommend that you visit a credit expert to get a free credit analysis and start placing your credit on the right path.
What elements make up my credit score?
- Payment History – 35%: this reflects whether you make your payments on time, have fallen behind on payments, or are in collection
- Balances – 30%: the proportion of your pending balances in comparison to the amount of credit available to you
- Age of History Credit – 15%: this indicates how long you’ve been borrowing
- Recent Credit Applications – 10%: determines how many credit applications you’ve processed in recent months
- New Credit – 10%: how many kinds of credit you currently have. For example, car, mortgage, credit cards, business loan, etc.
In order to properly understand the financial actions that influence your credit report, there are several elements that you need to consider within each one of these categories. For example:
- Credit History: your payment behavior shows creditors your financial responsibility. Payments that are higher than the minimum, and on time, are very positive signs. On the contrary, falling behind on payments, late charges, or collection calls, are not good.
- Level of Debt: according to experts, the balance of your debt should not exceed 30% of your available credit. So, if you have a line of credit, for example, of $10,000, your monthly balance should not exceed $3,000. If your balance is close to your credit limit and you are only giving minimum payments, this could be a sign that you do not have the capacity to pay, which can be hurtful.
- Age of Credit History: a lot of business owners feel frustrated when they find that even though they have only a few accounts and pay them all on time, their credit is not great. This is due to the fact that credit bureaus place a lot of emphasis on an extensive credit history that shows both payment consistency and a capacity to pay over long periods.
- Recent Credit Applications: the more you apply for credit, the more your credit score will drop. Applying for a lot of credit can mean that you are short on capital. That is not a good sign for a financial institution, because they may doubt your capacity to pay in the future.
- Credit Composition: if your credit report only shows credit card accounts, you can add credit variety by asking other creditors to provide your payment information to credit bureaus. These can include your student loans, store credit cards, furniture store credit, etc.
What does a good credit score do for you?
It is very important to restore, maintain, and grow your credit: that way you can enjoy great interest rates and keep financial doors open in case you need them. But above all, you will save tons of money! Ready to improve your credit score? Learn here how to boost your credit score by 60 points in 60 days!