At some point in time, every business owner thinks of acquiring a bank loan to raise additional capital. It might seem like a straightforward process, but there a few technicalities involved. You have to keep your property or asset as collateral and reveal the company’s financial data. Despite providing all this information, the lender can reject your loan application because of a poor credit score.
A credit score is one of the most critical measures of your company’s financial health in the finance world. It demonstrates how responsibly you use credit and whether you can ensure timely payments. Typically, it is a three-digit number ranging from 300 to 850 calculated based on the financial metrics. The regulatory bodies assess your payment history, how much money you owe, length of credit history, and credit activity to calculate the credit score.
Moreover, the importance of credit score isn’t only for people who seek loans. A high credit score can help people get more attractive insurance options. Therefore, keep a close eye on your credit ratings and try to improve the score. Here are five tips that can help in improving your credit score.
1. Review your credit file
Before you start figuring out how to increase your credit score, it is essential to determine your current score. Since your credit score depends on the information provided in the credit report, download the report. It will have records of debt, credit management, and repayment history. Likewise, it will have information about accounts closed down due to payment defaults.
You can pull a copy from credit bureaus such as TransUnion, Experian, and Equifax and see where the company stands. However, if you face difficulty comprehending the numbers and data on reports, brush up on your financial skills. You can look for a MACC online or take a few short courses to learn about credit scores and finance. In addition to analyzing the report, you will be able to spot errors that stem from data entry hitches by creditors.
2. Consolidate your debts
Sometimes, companies have a lot of outstanding debts. From a line of credits, equipment financing to conventional loans – debt accumulation reflects negatively on the credit score. Hence, consider consolidating your debt and pay them off together.
You will get a lower interest rate on loan, putting you in a position to pay the debt quickly. Besides, you can also use the snowball method to pay off debt. You will have to pay off accounts with the lowest balances and jump to the next.
In addition to credit score, consolidation can significantly improve the credit utilization ratio. You can apply a similar tactic and consolidate multiple credit card balances. It will allow you to pay off the balance with a transfer credit card, making repayments effortless. Remember to consider the balance transfer fees since it can cost 3%-5% of the amount you transfer.
3. Limit requests for new credit
Have you been applying for credit cards or loans frequently? The occasional requests for funding won’t have any effect on your credit score. However, repeatedly applying for loans can damage your credit score.
Whenever people request credit, lenders perform a hard inquiry. It is a review of your credit that displays on the credit report, decreasing the credit score. Additionally, the number of hard inquires you incurred reflects the level of a risk you hold as a borrower.
Moreover, opening many accounts over a short period can give a red signal to lenders. Banks will believe you need money because you are facing financial difficulties. Therefore, when trying to improve the credit score, avoid applying for new credit. Having a few or no recently opened accounts indicates stable financial health that can boost credit score.
4. Avoid credit card purchases
Usually, purchasing from a credit card can increase the credit utilization rate. It is a ratio of your credit card balances to the total credit limit of the card. And this ratio makes up 30% of the credit score. In simple words, the higher your balances are, the higher will credit utilization, and the more negatively your credit score gets affected. Under the Fair Isaac Corporation (FICO) model, entrepreneurs should aim for 25%-30% credit utilization.
In absolute terms, maintain a balance of $3,000 on a credit card with a limit of $10,000 to meet the 30% target. You will have to start making purchases through cash or debit cards to avoid any impact on your credit score. Otherwise, you can request to increase the credit card limit. It can help your credit card utilization as long the balance doesn’t grow.
5. Don’t delay payments
Unsurprisingly, your payment history is another element that impacts your credit score. Having a history of on-time payments can help you achieve an excellent credit score. Therefore, avoid delaying payments. Firstly, manage your credit card, loan repayments, and ensure to pay them within 29 days. Payments that exceed 30 days come under credit bureaus’ radar and hurt your credit score. You can set automatic payments through digital banking apps to avoid missing them.
Moreover, pay your utility bills promptly every month. Otherwise, you will have accrued payments on the balance sheet, showing an increase in current liabilities. Once the credit bureaus see a substantial amount of liabilities, they will lower the credit score. Hence, you have to stay on top of all business costs to close the door for delays and improve your credit score.
Everyone planning to acquire credit or buy insurance should try to improve their credit score. You can avoid excessive purchases from credit cards, make timely payments, and pay off the debts through consolidation. Likewise, limit new credit requests and keep reviewing the file to see improvements. Although it can take several weeks to see a noticeable impact on your credit score, it is super beneficial for the long run. In addition to giving financial freedom, you can enjoy low interest rates with high credit scores.