Every business owner knows the value of ‘credit’ and credit score plays a goodly role in determining creditworthiness. A high business credit score dramatically increases your chances of getting credit, and your eligibility while applying for business loans, and other business credit. For lenders, it helps determine the cost of borrowing, helping you with better interest rates on future loans. While the importance of credit score is understood, not many of us know how to maintain a good score and in fact, maybe hurting it with our actions.
Here are 6 mistakes that one needs to avoid in business in order to get a good credit score.
Mistake#1: Skipping your repayments
The most basic & mutually understood dialogue of any lending transaction is “ill give you the money, just return it back to me on time”. If you do only this, you are pretty safe and in fact better than most. Many people experience a dip in their credit score just because they “forgot” to pay the installment on time! If that’s a possibility with you, make sure you set some sort of a reminder to remind yourself of your pending payments and liabilities. If you are unable to make payments due to the non-availability of funds at the moment, then try seeking help from family or close friends who can trust you. (P.S: don’t betray their trust!)
Mistake#2: Becoming a loan guarantor
Taking a cue from the preceding point, you don’t necessarily need to be in the receiving position to lose out on your credit score, you can also switch roles and yet receive a blow to your business credit report. This can happen when you become a guarantor to a borrower who defaults their payment. In most cases, it could be your own family members, an employee, or a friend, who needs you to be a guarantor to their loan. You might be caught in a social dilemma if you refuse them, but sometimes, you need to use your own sound judgment to decide! One way is to make sure to check the borrower’s financial history by checking their credit report & credit score and then determine their ability to repay the loan before agreeing to be a guarantor.
Mistake#3: Exhausting your business credit card
Just like the top speed on your speedometer is not meant to be reached at all times, the credit limit on your credit card is not meant to be utilized to the brim. In fact, in theory, the actual spending ratio is expected to be kept under 30% to 40% of your credit limit. The higher the credit utilization ratio, the higher is the risk of your credit score dropping down. If you notice that your credit card usage is a lot, you can consider getting a separate debit card for your business to handle day-to-day expenses. This ensures that your credit utilization ratio stays low.
Mistake#4: Opting for too many credit cards
Having too many credit cards is a direct indication of having too many ‘credits’ and credits are not very reputable. Additionally, when you opt for too many credit cards within a short span of time, it indicated a “credit hungry” behavior which is even worse a reputation to have! As a middle way out, it is recommended that you use a couple or maybe an extra credit card if you have to and make sure your collective spending is within a range of 30% to 40% as discussed before.
Mistake#5: Not using your credit card at all!
While having too many credit cards is credit hungry behavior, not using your credit is a credit starve of sorts! When you fail to use your credit card, you miss out on crucial opportunities to build your credit history and potentially a credit score. A good score is built on good credit behavior which is indicated by a solid credit history – the more the better! Hence, by availing of a business term loan or using a business credit card and repaying the EMIs and bills on time, you are demonstrating your credit management skills.
Mistake#6: Not keeping a track of your credit score
As a business owner, you need to perform a periodic business credit score check and download your credit report to ascertain your credit status. By periodic, it means once every 3 to 6 months. This will not only help you to understand where your business stands, it also makes it easy to spot any errors or discrepancies in your credit report. You may also be able to detect a fraudulent activity yourself. You can check your online credit score and download your credit report on the website of the CRIF credit bureau. Unless you check your credit report, you won’t be able to rectify the mistakes, if any, on your credit report!