Being an entrepreneur with a startup there will be times (and most likely more than one) where you need to borrow money. It could be your startup seed money to get off the ground for your latest idea, or a loan to keep the lights on and prevent your business from pending doom. No matter what it is, your credit score is essential in determining if you will get that loan or face financial rejection.
What Is My Credit Score?
You credit score is a 3 digit number that ranges from 300-850 and somehow has all the power over your personal finances. It is the first place lenders look to determine if you are trustworthy for a line of credit and will be able to pay them back.
The higher the score, the more confidence lenders will have in your ability to repay the loan as you have demonstrated responsible credit behavior. Having a score closer to 850 will open up lower annual interest rates and possibly other additional benefits.
What Is Your Score?
While some of you may avoid looking up your score, and others may be checking it daily, it is important to know what your score is. According to ValuePenguin, the average FICO credit score in the United States is 695. Do you know where do you stand?
Here is an overview look at credit score ranges to give you some more insight:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
Why is My Credit Score Important?
Well if you are in need of money for your startup business, your credit score will determine whether you pay low interest or higher interest, that is if your score is good enough in the first place.
For example, a startup entrepreneur looking to take out a small business loan with a Very Good score of 745 may get an annual percentage rate (APR) of 6% while another entrepreneur with a Fair score of 630 may get an APR of 11%.
In numbers that can mean paying either $4,000 a month or $6,000 a month depending on the loan amount and interest rate. That few dollars difference could mean a profitable business or one that is in the red.
So in short, a good credit score puts money back in your pocket! It decreases the amount you have to pay back in interest to the creditor.
What Can You Do?
The best approach is to learn how your credit score is calculated. Good news is it’s not a trade secret formula or something that only bankers know. In fact, it is actually just five factors that are considered in the credit score calculation. And the best part is you can control all of these.
So let’s dive in!
What Makes Up My Credit Score?
Payment History - 35%
This factor considers all of your payments you have made over the life of your credit. It includes both on time and late payments. Just one late payment here can significantly decrease your credit score dramatically. So you don’t fall late, setup auto payments or at least payment reminders to stay on track.
Credit Utilization - 30%
Your credit utilization is the amount of credit you have used compared to the total amount available. The lower the credit utilization, the better your score will be. The target is to be below 30% utilization for a positive impact. – This does not mean max out your card!
Length of Credit History - 15%
This factor looks at how long you have had your line of credit open. The longer you have had your credit, the better your score will be. So if you just opened your first line, take some time to build up your credit length. – That does not mean keep opening and closing new ones!
Types of Credit - 10%
This is considered by the credit bureaus as your “credit mix”. This is a mix of all the various types of credit you have open such as loans, mortgages, retail cards, etc.. The target is to have a healthy mix but since it only accounts for 10% of your score, it does not mean open up some new lines of credit.
New Credit Inquires- 10%
Every time you apply for a new store card or seeking to get the latest airline points promotion counts as a credit inquiry. The more inquiries you have over a short period of time, the more of a negative impact you will have with your score. To creditors, this could appear like you are thirsty for credit which is never a good sign. – Prevent yourself from opening the latest store cards and keep your inquiries to a minimum.
Take Control of Your Credit Score!
The more you learn, the more you will earn! Understanding these five factors will allow you to get the lowest interest rate when you need to get a business loan or open a new credit card. Focus on optimizing each one of these factor to get that perfect 850.
Additionally if you are looking to monitor your score, try the CreditKarma app to monitor for any changes and learn ways to improve.
Good luck and next time save yourself money by optimizing your credit score!