Banks, financing companies and other lenders carefully review a number of factors when deciding if they'll provide credit to small business owners. One of the biggest factors is your credit score. It's important to know what goes into your score and what lenders are looking at when deciding if they'll extend credit to you.
Most of us have a vague idea of what a credit score is. This composite score is calculated by adding up a number of factors. The credit score range in the United States is 300 to 850, with the median credit score estimated to be 723. The higher your credit score, the better. Those with scores above 750 enjoy lower interest rates and an easier loan approval process.
Credit Score Breakdown & How to Maintain or Improve It
Below are the "categories" of your credit score and a percentage weight given to each. As you review each, think about how you can make efforts to either maintain or improve your individual sore:
- Payment history (35%). This is just what you would expect – are you paying your credit card, mortgage, utilities and other bills on time?
- Amount owed (30%). How much do you currently owe to different creditors? All of your outstanding debts are reported to the three main credit bureaus (Experian, Equifax, TransUnion). The total amount will figure into your score.
- Length of credit history (15%). How long have you had your credit cards? Those with a longer history will be regarded more favorably than brand-new accounts.
- New credit (10%). Opening several accounts in a short period of time is generally a red flag to lenders. This may suggest that you are over-extending your repayment ability.
- Types of credit used (10%). In addition to looking at how many of your loans are paid back in set installments, lenders also consider how much of your debt is revolving credit (a line of credit or credit card). It’s not a bad thing to borrow money, because that’s how you build a strong credit history. However, most lenders will look closely to ensure you are not overextending yourself. This means looking at how much credit you owe in total, the different types of credit you have or have had, and the relation of current credit card balances to your total available credit. Usually, numerous credit cards with high balances, particularly those near their maximum, will lower your credit score.
- Outside the percentages. It goes without saying that liens, collections, judgments and a previous bankruptcy can also significantly impact your credit score and your ability to obtain new credit. Your lender will review these items closely.
That’s it. It’s pretty simple really, because all these areas are under your control. With a disciplined approach to your finances, you should be able to maintain a high credit score, or improve your score over time. Understanding your credit score and how you can manage it well can help ensure your success in obtaining credit at the most favorable terms.
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