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Did you know that your personal credit score can make or break your business’s ability to get the financing it needs to start or grow? As a small business owner, your personal credit score is one of the most important factors that lenders consider when deciding whether to approve your loan application. It’s a snapshot of your financial health and responsibility, and it can determine not only whether you qualify for a loan, but the interest you’ll pay and the amount you can borrow.

Understanding how personal credit scores work and working to build or maintain good credit will ensure you have access to a wide range of loan options and the flexibility to choose the best solution now, and as your business grows. Read on to learn how credit scores work and what you can do to make sure yours is as strong as possible.

How do small business lenders use personal credit scores? 

Lenders rely on personal credit scores to evaluate small business loan applications, viewing them as a reflection of the financial management skills and, importantly, character of the owner or owners.

A high score shows that you can manage debt responsibly, giving lenders confidence. Therefore, you’ll be able to qualify for a wider range of loan options at lower interest rates and better terms. A low credit score suggests potential difficulties in paying your debts, making you riskier in the eyes of a lender. As a result, your loan options will be more limited, and the interest rates you pay will be higher. 

Life has ups and downs, and sometimes things like divorce, job loss, or illness can make it hard to pay bills on time, therefore lowering your credit score. If this happens to you, it’s important to focus on improving your score as quickly as you can (see our tips below). This will get your score back into a range that will automatically qualify you for more affordable loans in the future and demonstrate to lenders in the short term that you’re responsible because you’re fixing the problems that you have. 

How are credit scores calculated?

Your credit score is a three-digit number that ranges from 300 to 850, with higher scores indicating better credit. In general, scores between 300 and 620 are considered poor, scores from 620-700 are considered good, and scores of 700 and above are excellent. If your credit score is zero, it means you do not have a credit history at all, and need to establish credit.

You should check your credit score and report at least once per year using the website annualcreditreport.com, which is a government-backed site that provides free or low-cost access to this information. Websites such as Credit Karma are convenient, but offer credit score estimates and not accurate reporting.

Understanding how your credit score is calculated is the first step in knowing how to manage and improve it. There are a few main things that affect your credit score:

  • Payment history (35% of your score): Paying your bills on time increases your score.
  • Credit utilization (30% of your score): Using more than approximately 30% of your credit limit lowers your score.
  • Length of credit history (15% of your score): Having a longer credit history increases your score.
  • Credit mix (10% of your score): Having a good mix of credit types (e.g. credit cards, mortgages, and car loans) increases your score.
  • New credit inquiries (10% of your score): Applying for new credit lowers your score.

How do I improve my credit score?

Remember, working to improve your credit score shows lenders that you’re responsible in the short-term, and will help you qualify for more loan options at better rates in the future.

If you need to improve your credit score, here are some things you can do:

  • Begin paying your bills on time and in full.
  • Try to keep your credit card balances low (less than 30% of your credit limit).
  • Keep old credit card accounts open to lengthen your credit history.
  • Have a mix of different types of credit, like credit cards and loans.
  • Don’t apply for a lot of new credit in a short time.
  • Check your credit reports regularly to make sure there aren’t any mistakes.
  • If you find errors on your credit report, dispute them—especially if they’re for medical bills.
  • Get on a payment plan for any overdue debt, particularly medical bills.

Summary: Good credit equals more opportunity

Remember, having good or excellent credit can open up more opportunities and help you get better loan terms, so it’s important to make improving your credit a priority. By understanding how credit scores work and taking steps to improve your credit, you can increase your chances of getting the funding you need to help your business succeed.

If you have questions about your loan options as they relate to your credit score and other financial and business factors, we’re here to help! Schedule a free consultation with a Grow America lender and we’ll talk through your options.