If you’ve ever applied for a mortgage, bought a car, or even rented an apartment, you’ve likely experienced firsthand how much power your credit score can have over your everyday life. But, did you know that your personal credit score is also just as important in the business loan process?
A great credit score is like an all-access pass to your financial dreams. But, what if your score isn’t so great? You’re sitting in the nosebleeds, desperate for a better financial position.
Even if your credit score is less than stellar, you don’t have to be stuck in the same spot forever. With patience, dedication, and persistence, there’s a lot you can do over time to improve your credit rating and bring yourself financial freedom.
Six steps to building a rock star credit score:
1. Know your starting point
Before you can improve your credit score, you need to know where you’re starting from. What is your current score, and how far do you have to go to get the rockstar credit rating you’re looking for?
Some credit card companies will show you your credit score right on your monthly statement, or by signing into your online account. Otherwise, you can find it on sites like this.
When you know your current credit rating, you can compare your number to the categories established by credit reporting companies. At Fundera, we generally advise that a score over 700 is excellent and will offer the best options for those looking for business loans. A score of 650-699 is great. 600 or above is average, and will still give you some options to choose from. In general, we consider a credit score below 550 to be a poor rating with little if any business loan options available.
If your credit score needs work, the following steps should help you work toward a rating that will allow you to reach your financial goals.
2. Look for errors
Obviously, much of the credit and finance machine is, well, done by machines. Computer algorithms and formulas take the subjectivity out of determining who makes a good risk and who doesn’t. But, that’s not to say there aren’t errors.
For example, consider a father and son who share the same first name (Robert) with different middle names. No Jr. or Sr. in this case. Yet since the son entered adulthood 20-plus years ago with his first credit card and auto loan, there have been instances where accounts for one or the other showed up on the other’s credit report.
Being in different life phases with a disparity in their respective incomes, you can see how failing to fix a credit report error caused by something so small could ultimately be detrimental to building a good credit score.
Check your credit reports regularly for any discrepancies or irregularities in the reporting. Make sure that you recognize all of the accounts and entries, and if you find an error, contact the reporting agency in writing to correct it. The process of working with credit agencies to fix errors can require a lot of persistence, but it’s worth the effort to get the credit score you deserve.
As you go through this process, make sure you are checking reports from all three of the major U.S. reporting agencies: Experian, TransUnion, and Equifax. All three have different methods for collecting the data that makes up your credit reports, so it’s not guaranteed that your reports from each agency will look exactly alike.
3. Consider closing dormant accounts
Maybe you opened a line of credit at a furniture store in your early 20’s, when you graduated from your childhood mattress to something bigger for your first apartment. If the account is long dormant, but at one point you were late on payments, the dormant account could still be impacting your credit score years later. So if you’re not in the market for new furniture, it may be beneficial to close the account.
Multiple open lines of revolving credit, such as from various store credit cards, tend to suggest erratic credit behavior, or a high credit utilization rate. If you have a slew of rarely used old accounts, it may be worth closing a few.
But before you make the choice to close accounts, do your research to see how they are affecting your credit score. Long-standing credit accounts that have been consistently paid on time and in full can actually improve your credit score, so you’d benefit from keeping your longest running main accounts in good standing.
4. Increase your credit limit
Your credit utilization rate—or the percentage of your total credit limit that is being used at any one time—can have a big impact on your credit score. If you’re a loyal customer in good standing, talk to your credit card company about raising your credit limit.
But remember, raising your credit limit doesn’t mean charging a bottle of Dom Perignon. To improve your credit utilization rate, keep operating day-to-day as if you have the same credit limit that you did before.
5. Raise your income
Unless a promotion is in your future, you may wonder, “How on earth can I raise my own salary?” But if building your credit score sufficiently to gain loan approval is your goal, then that may mean you take on a second job for awhile in order to pay down debts.
Second jobs aren’t new to entrepreneurs; many people can’t leave their day job before the business they own is up and running successfully, and others need a second job to supplement their income. Could it be worth some extra nights and weekends to get you one step closer to the financial future you want?
6. Revisit your credit score regularly
Even if you’re diligently following the steps above, raising your credit score isn’t an overnight fix. Undoubtedly it will take three, six, or even nine months to fix your credit report, minimize your expenses, and pay down bad debts. But with some effort, you’ll make significant progress.
Mark your calendar to re-check your credit score and report regularly—at least every six months if you plan to apply for a major debt, such as a business loan, in the near future.
Unfortunately, there are no shortcuts to building a rock star credit score. It takes time, diligence, and a commitment to making smart financial choices in order to keep your debts in check. But by applying these steps, you should see progress over time in your effort to achieve your financial goals.
When you’re ready for a loan, check out our Small Business Loans Guide and the Bplans Loan Finder.
Do you have experience repairing bad credit? Have you experienced errors on your credit score?
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.
