Low credit scores, bankruptcy, too much debt—plenty of issues can torpedo your credit score. Here’s how to build it back up.
So you haven't been exactly squeaky clean. Credit card debt tends to accumulate, especially when you're starting a new business and trying to manage all the expenses that come up before the revenue starts rolling in. Or maybe old debt is following you around: past-due bills, or even a bankruptcy.
A bank loan would help get the business off the ground, but those are hard to come by even with sterling credit. As lenders consider your case, they'll look not just at your business plan but also at your personal history of fiscal responsibility: your credit score. If it is anything less than perfect, here are some steps you can take to clean it up.
Weigh the scales.
"A credit score is affected by many factors, but one of the major factors has to do with credit card credit limits vs. credit balances. The amount you owe compared to the amount of your credit limit makes up 30 percent of your credit score," says Herb Ziev, a loan originator with Home Source Mortgage in Plano, Texas. If you have to operate off credit cards, "you may want to consider applying for business credit cards instead. This will allow you to limit the amount of debt on your cards."
Don't sweat an old bankruptcy.
A bankruptcy judgment stays on your credit report for 10 years, no way around that. But it won't necessarily torpedo your credit rating, since the negative impact of the bankruptcy is tempered as years pass and good credit takes the place of bad. (It may seem counter-intuitive, but you should continue to take on debt in order to show that you can use debt responsibly. Just be sure to pay it off.) Diligence in the long term will vastly increase the odds of putting bankruptcy behind you in the eyes of lenders, though you may end up paying a higher interest rate to mitigate perceived risk.
Keep a small recurring charge
active as an automatic payment: a
Netflix subscription, for instance.
This helps maintain a long credit
history with minimal hassle.
Keep your card.
"Maintain old credit card accounts–the older your credit history, the better," says Jeffrey Strickfaden of Improve Credit Consulting Firm. If you stop using cards, issuers may close them out, so keep a small recurring charge active as an automatic payment: a Netflix subscription, for instance. This helps maintain a long credit history with minimal hassle.
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Pay your bills on time–preferably early.
"When you incur debt, there is nothing the debtor wants to know more than whether you will pay back the debt as agreed," says Tye Warren, director of Capital Access Program, Alabama Small Business Development Center, University of Alabama. "Your payment history with other creditors offers a fantastic way for would-be lenders to gauge this, and is the most important factor in determining both your personal and business credit scores. Thirty-five percent of your personal credit score is based on your payment history."
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Check and re-check.
Periodically review credit reports for accuracy. "If the credit reports show any inaccuracies–from address to an incorrect outstanding balance on a credit card–correct them. The best, fastest and most effective way is to follow the directions on each agency’s website," says Kevin Gallegos, vice president of Phoenix operations with Freedom Financial Network. "Under terms of the Fair Credit Reporting Act, the credit bureaus must investigate any disputed items and remove them from the credit report if they cannot be verified. If you disagree with the results of a credit bureau's investigation, you can ask the bureau to include a statement of dispute in your file and your future reports."
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