How to Check Your Personal Credit Score Before Getting a Business Loan
by Fundid on Jun 22, 2023 8:30:00 AM
Do you know your personal credit score? Credit scores are an important financial tool that can affect everything from whether or not you can get a loan to how much interest you will pay for that loan. Fortunately, it is easy to check your credit score. This guide will help small business owners understand the value of their credit score and explain how to check it.
How Personal Credit Scores Work
A personal credit score is a three-digit number between 300 and 850 that summarizes someone's credit history—generally, the higher the number, the better the score. Lenders use a person's credit score to determine if they are reliable borrowers who will make payments on time.
The most commonly used scoring system is FICO, which stands for Fair Isaac Corporation and was developed in 1956 by Bill Fair and Earl Isaac. The second most used scoring system is the VantageScore, created in 2006 by the three major credit bureaus — Equifax, Experian, and TransUnion. While both scores are similar, their weight in calculating your overall score differs - let's take a look.
The Importance of Your Personal Credit Score
Your personal credit score is a crucial part of your financial health. A good credit score indicates to lenders that you are a responsible borrower who pays their bills on time and manages credit responsibly. In addition, a higher credit score can translate to lower interest rates, meaning you'll pay less in interest over a loan or credit card life. This can save you hundreds or even thousands of dollars over time.
Your credit score can also affect your ability to access certain financial products. For example, if your score is low, you may not be able to qualify for a mortgage or car loan, or you may be required to pay a higher interest rate. This can limit your options and make it harder to achieve your financial goals.
In addition to impacting your access to credit and financial products, your credit score can also affect your personal and professional opportunities. For instance, potential landlords may check your credit score during screening. If your score is low, it may raise red flags and negatively impact your chances of getting approved for a rental.
How is a Personal Credit Score Calculated
When calculating a person's overall credit score, factors include payment history, the amount owed, length of credit history, new accounts opened, and types of accounts held.
Each of these categories carries a different weight that impacts your credit score. When using the FICO credit scoring system, they weigh your score by:
- Payment history = 35%
- The amount owned = 30%
- Length of credit history = 15%
- New accounts opened = 10%
- Types of credit used = 10%
When using the VantageScore credit scoring system, they weigh your score by:
- Payment history = 41%
- Length of credit history = 20%
- Credit utilization = 20%
- New accounts opened = 11%
- Balances = 6%
- Available credit = 2%
Ways to Check Your Personal Credit Score
There are several ways to check your personal credit score. The first way is to sign up for an online service such as Experian or Equifax that offers free access to your credit report and score once a year. By signing up with one of these services, you can monitor your score over time and take steps to improve it if necessary.
You can also contact one of the three major bureaus—Equifax, Experian, or TransUnion—and request a copy of your report. Lastly, some banks offer free access to customers with their accounts at those institutions; be sure to ask if this service is available at yours!
Steps to Building a Strong Personal Credit Score
Building and maintaining a strong credit score is essential in creating financial health. Therefore, staying informed of how your credit score can impact your long-term financial goals, such as obtaining low-interest rates when seeking business funding or accessing higher credit limits, is essential. Thankfully, there are a few easy steps to build (or improve) your credit score.
First, you should always pay off any debts on time each month so that creditors know you are reliable. Keep your accounts open - maintaining a healthy balance on your oldest accounts looks good on your credit report. Finally, track and manage your credit score consistently through free resources available online; by doing this, any discrepancies or issues can be identified quickly. By implementing these sensible steps into one's financial strategy, you'll be well on the way to achieving a strong personal credit score!
Personal Credit Score vs. Business Credit Score
Personal and business credit scores play a significant role in the financial world. A personal credit score reflects an individual's creditworthiness, while a business credit score reflects a company's creditworthiness.
While some overlap exists, these two scores are evaluated differently. For example, a personal credit score typically considers an individual's payment history, the amount owed, length of credit history, and credit mix. On the other hand, a business credit score generally factors in payment history, credit utilization, public records, time in business, industry risk, and more.
Understanding the key differences between personal and business credit scores can be important for small businesses seeking funding. Individuals and companies can achieve financial goals by managing credit scores effectively while building a strong financial profile.
Does Applying for Business Funding Affect My Personal Credit Score?
If you're thinking about applying for business funding, it's important to be aware of how it can impact your personal credit score. The majority of lenders will take a look at your personal credit score when assessing your eligibility for business financing. However, reading the fine print before proceeding with any credit applications is important.
While some lenders may only perform a soft credit inquiry (which doesn't impact your score), others may require a hard inquiry, which could hurt your score. Overall, knowledge is key in protecting your credit score and being informed about the terms and conditions of any business funding application is essential.
Other Important Things to Know About Your Personal Credit Score
Your credit score can vary. Check your credit score with the three major bureaus—Equifax, Experian, or TransUnion. You may find that all three scores are slightly different. This isn't anything to be alarmed about, as not all lenders report to the three major bureaus, and the model each uses can differ.
Tips for Maintaining a Healthy Credit Score
Maintaining a healthy credit score is essential to your financial well-being. Here are some practical tips to help you keep your credit score in good shape:
- Pay your bills on time: Payment history is the most critical factor in calculating your credit score. Late payments can significantly damage your credit score, so pay your bills on time every month. Consider setting up automatic payments or payment reminders to help ensure you don't miss a payment.
- Keep your credit utilization low: Credit utilization is the percentage of your available credit that you're using. High credit utilization can signal to lenders that you may be overextended and unable to manage your debts. Keep your credit utilization below 30% to maintain a healthy credit score. For example, if you have a credit card with a $10,000 limit, keep your balance below $3,000.
- Monitor your credit report regularly: Your credit report contains a detailed history of your credit accounts, payment history, and other information used to calculate your credit score. It's essential to check your credit report regularly for errors, inaccuracies, or signs of fraud. You can get a free copy of your credit report from each credit bureau (Equifax, Experian, and TransUnion) once per year. Consider setting up a schedule to review your credit report.
- Keep old credit accounts open: The length of your credit history is another crucial factor in calculating your credit score. Keeping old credit accounts open, even if you're not using them, can help to lengthen your credit history and improve your credit score.
- Be careful when applying for new credit: Applying for new credit can trigger a hard inquiry on your credit report, which can temporarily lower your credit score. Before applying for new credit, ensure you understand the terms and conditions and are confident you can manage the new debt responsibly.
By following these tips and practicing responsible credit management, you can maintain a healthy credit score over time and increase your chances of accessing credit and achieving your financial goals.
Set Your Business Up for Financial Success
Ultimately, your personal credit score is an important factor for obtaining business funding, now and in the future. It can affect what type of loan you will be able to secure, as well as the interest rate and period of repayment. Therefore, it's important to make sure you maintain a good credit history. Don't let a poor credit score keep you from achieving success with your business ventures. Remember to maintain an eye on your credit score and make sure all payments are made on time. For more tips on growing a successful business long-term, be sure to subscribe to our newsletter today!