It’s called good credit because it can save you money on things you wanted to buy. It’s like a voucher without an expiry date that can get you pretty discounts on cars, mortgages, education loans and so on. As a small business owner, you might want to pay attention to your credit scores and understand what weight certain factors bear on it and how they can either sink your business or float it.
Having a good credit score means the 3-digit number (between 300 and 850) vouching for your credibility is in the higher bracket of 700-850. When it buoys in that category, you can expect the best bonus and introductory offers for credit cards, lower interest rates, better rates on mortgages and car insurance, 0% financing on new cars, and higher credit limits.
Which is why they ask you not to buck the system!
FICO (Fair Isaac Corporation), which created the credit rating system, determines your credit worthiness based on where you fit on the grade. [This approximation has been nicked from A.L. Church for educational purposes].
- Excellent (751 & higher) – Approved at lowest interest rates
- Good (711-750) – Approved at competitive interest rates
- Fair (651-710) – Approved at moderate interest rates
- Poor (581-650) – Approved at high interest rates
- Bad (300-580) – Denied credit or approved only for the very highest rates
Turns out only ½ a percent of consumers – we kid you not – qualifies in the first category. This bit of information may console you. You’re welcome. However remember what we said about good credit? So your aim should be to strive for the upper levels of the system.
So what are the factors that can derail your credit scores and how much muscle do they wield?
- The biggest and most common factor to affect your score is how you pay – consistently on time or consistently late. You record will reflect the past 2 years of your credit history. The only things worse than delinquent accounts are accounts sent to collections or bankruptcy.
- High utilization is less attractive to lenders because the ratio of your total debt to your total available credit matters. A lot. It’s an influential factor because high utilization means higher risk for the lender.
- Long consistent credit history, especially with the same creditors, is directly proportionate to good credit score.
- When you have a nice credit mix – e.g. a mortgage and revolving credit like a credit card, it reflects fiscal responsibility. So variety begets excellent credit scores.
- The least impactful factor, but a factor you could remember to follow, is new credit. If you have a gazillion credit card applications over a handful of days, it is bound to cast a little shadow. However, delinquent payments and bankruptcy are comparatively weightier problems, so new credit pales in comparison.
And there you have it: factors affecting your credit score in order of weight and importance.