Entrepreneurs Need to Care About Their Credit Score

Your credit score is almost as important as your bank balance. Whenever you’re running a startup, chances are you’re turning to alternative sources of funding to keep your dream alive. Whether that’s money from relatives or leaning on your credit cards, maintaining and improving your credit score can have an impact on your business.

Consider this simple scenario – you need to cash to get your new venture off the ground and your first stop, after asking family and friends, is going to be a financial institution. Most banks will not lend you money without a personal guarantee, which means they will pull your credit score as part of their due diligence in learning how risky a borrower you will be. If they like what they see, you get money to fund your venture. If they don’t, your next best option is to turn towards credit cards. Whether you get approved for a credit card, the interest rate you pay and the total credit limit will be, in part, determined by your credit score.

A good credit score means you get access to funds, a weaker score means you either don’t get access to those funds or you have to pay a significantly higher interest rate, which can negatively impact your business. Every extra dollar you pay in interest is one that you cannot invest in your business. In those early years, every dollar is crucial.

So what can you do to improve or maintain your credit?Don’t apply for credit cards until you need them. When you apply for a credit card, the credit card company will pull your credit. It’s known as a “hard inquiry” and that’ll decrease your credit score by a few points. The latest reward credit card might look great to you but it’ll cost you a few points on your score. If, and when, you do need to go down that route, apply to several at once so each sees your score before the reports record the hard inquiry.

Review your credit report. Credit reports are notorious for having erroneous information because the credit bureaus will put anything they receive on it. They have no real way of confirming that information so they record everything. I’ve seen credit reports with multiple social security numbers, multiple addresses over the same period, and even ones that have listed accounts for different people. The Fair Credit Reporting Act lets you see your credit reports for free each year, just go to AnnualCreditReport.com. When you do find errors, dispute the errors immediately as it can take some time to resolve.

Keep your spending in line and remember to pay on time. Two pieces of the credit score calculation are credit utilization and credit history. Credit utilization refers to your usage of your available credit. The lower this percentage is, the better. If you have $10,000 in credit limit and are using $1,000 each month, that’s a utilization of 10%. Credit history just refers to your history of payments. Someone who has had a credit for five years and has never missed a payment is more reliable than someone with only a year of history. Good behavior is rewarded here so make sure you keep making those payments on time.

Finally, what is a good credit score? Fair Isaac Corporation, the folks who created the FICO credit score, believe that if you have a score about 760, you qualify for the cheapest of home mortgages. If you have a score over 700, you’re still getting a good rate. My feeling is that anything above 700 is good and anything above 760 is great.

Keep that credit score nice and clean and it’ll be easier to get access to money when you need it.

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