Are you an entrepreneur with dreams of earning a perfect credit score? Being able to boast this top score comes with serious advantages, including lower interest rates on financial products you need to grow your business.
But how do you unlock these rates if you have a less-than-perfect score right now? Here's a start: make sure you aren't committing the following four mistakes that could be damaging your score.
1. Confuse Corporate and Consumer Files
A common misconception about credit is that business and personal mix. They don't.
While your business and personal credit reports serve similar purposes, they're more different than they are alike. They use different scoring ranges, and they record different borrowing information.
Put simply, only business loans, business lines of credit (LoCs), and business credit cards will go onto your corporate report. And only installment loans, personal LoCs, and consumer credit cards will go on your personal report. Loans provided by a lender like MoneyKey should only be used for personal emergencies, not business expenses.
As a result, you can't cut corners by using your personal accounts to build business history or vice versa. Consider them completely separate accounts.
2. Make Sure Your Lender Reports to a Credit Bureau
Prompt payments build consumer and business history, but only if lenders report your payment history, utilization, and more to one of the major credit bureaus.
Some personal lenders may not report your installment loan account history to a bureau unless your account falls delinquent. While paying bills on time will keep bad history off this account, it may not add positive history as you would suspect.
The same rules apply to corporate accounts; a lender may not always report all account history to the major business bureaus. So always check the fine print to ensure you know what will and won't go into your file.
3. Always Make Payments on Time
So, you've found out an account will only report you if you make a bad decision. This doesn't give you license to take your due dates with a grain of salt.
Your payment schedule isn't something you can flub; they're hard dates that you must meet each time - whether they report your positive payment history or not.
Regardless of their reporting style, you should always commit to positive payment habits. Set up reminders so that you don't forget when to pay. Then sit down with your budget to ensure you prioritize these payments over discretionary expenses.
4. Maxing out Cards
Maxing out your revolving accounts (LoCs and credit cards) can be harmful to your finances.
For one, it ties up all your available credit until you pay off your balance. If an unexpected emergency arrives before this happens, you won't have any wiggle room with these accounts to help.
For another, it affects your utilization ratio, which impacts your corporate report and score. This ratio details how much of your available limit you use at any given time.
Scoring models reward you when you can keep your ratio below 25 percent, as this shows you don't need revolving accounts to make ends meet. A low ratio implies you're budgeting your money properly so that you aren't constantly putting things on these accounts.
These mistakes are easy to make if you don't understand how they affect your scores. Now that you know their possible impact, find out what you can do to cut them out of your life and learn how to make positive habits in their place.