Credit scores are a necessary aspect of loan approval. Financial institutions use credit scores as a measure of creditworthiness. If you are a business owner, you need to be aware of personal credit scores vs. business credit scores; and how to boost them.
A personal credit score is a measure of your creditworthiness as a person. It measures your personal ability to repay a loan. On the other hand, a business credit score measures your company’s creditworthiness. It shows the ability of your business to repay a debt. For sound financial management, it is essential to understand the difference between personal and business credit scores. Here’s a look at both credit scores in more detail.
What is a personal credit score?
A personal credit score is a three-digit number between 300 to 900, and it represents your creditworthiness or your ability to repay a loan. The higher the score, the easier it is for you to get a loan. Any score below 600 is considered a poor credit score.
Creditors assign significant weightage to a loan applicant’s credit score when lending money. For the best interest rate on unsecured loans, such as personal loans, you need a personal credit score of at least 750.
Who and what defines your personal credit score?
Your personal credit score is calculated by credit rating agencies such as Experian, Equifax, and TransUnion. Here is what their algorithm takes into account when determining your score.
- Payment History (35%) – Your payment history shows your ability to pay your debts back in time. This is the first thing any potential creditors want to know.
- Amount Owed (30%) – If you owe large amounts of money, you may be unable to repay all your debts monthly. This factor makes you a high-risk debtor.
- Length of Credit History (15%) – Building a good credit score is all about effectively managing your finances in the long term. If your credit history is longer, your credit score could be higher too.
- Credit Mix (10%) – If your credit mix is diversified and includes different kinds of debt, such as retail cards, credit cards, car loans, and more, your credit score will be higher.
- New Credit (10%) – If you’ve opened several new credit accounts every few months, you may be categorized as a high-risk loan applicant.
3 Tips to boost your personal credit score
There are many ways to improve or maintain a good credit score. Below, we have listed the top three ways of boosting your personal credit score.
- Automate Your EMI & Bill Payments – Timely repayment of loans accounts for 35% of your credit score. So, if you need to maintain a good credit score, it is essential to automate your monthly payments to ensure they are completed on time.
- Adjust Your Due Dates – Adjust your due dates according to your paycheck. Except for home loans, you can easily adjust the due dates of all your payments by talking to your lenders and service providers.
- Keep Your Credit Utilization Ratio at 30% – If you use credit cards, make it a habit to pay your credit card bills in full every month. Maintain a balance of no more than 30% of your credit limit on each card.
What is a business credit score?
A business credit score or a commercial credit score helps financial institutions understand your company’s financial health. A high business credit score improves your chances of getting a business loan with favorable repayment terms. Vendors and suppliers also check your business credit score when considering whether to invoice your business on a Net 30 or Net 60 basis.
Who or what defines your business credit score?
Most businesses must register with credit rating agencies to establish their business credit score. Here is a look at how the different agencies work.
- Equifax – Equifax considers your business’s available credit ratio to utilized credit, business age, business size, demographics, and public records. Small businesses are scored between 101 to 992 on the Small Business Credit Risk Score for Financial Services. They also receive a Small Business Credit Risk Score for Suppliers on a scale of 101 to 816.
- Experian – The factors considered are similar to those of Equifax. Experian also gathers data from lenders and vendors about a business’s creditworthiness. They take repayment data about credit lines or loaned money and compare it with your industry peers’ data. The Experian business credit score is on a scale of 1 to 100.
- Dun & Bradstreet – Dun & Bradstreet works with a one-year payment history of your business, a financial stress score, and other data from at least four vendors. This credit score is on a scale of 1 to 100.
3 Tips to boost your business credit score
Boosting your business credit score can help you attain funding during a financial crunch. It can also help make the terms of the loan more manageable. Here is a look at some things you can do to improve your business credit score.
- Credit Lines – Establish credit lines with vendors and suppliers on a 30-day or 60-day basis. Establish a practice of honoring your credit line payments with your vendors and suppliers. It will help you build a credible financial record in the long term.
- Timely Payments – Make all your loan and bill payments on time to create a flawless credit history for the credit reporting bureaus to peruse.
- Cover Annual Debt Obligations with Net Income – A thumb of rule in business is that your net income (revenue after subtracting all costs) should be equal to your debt. Be careful how much you borrow in a year to ensure you can cover your annual debt obligations with your net income.
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