By Gerri Detweiler, Nav
Thursday, July 13, 2017
On the cusp of some serious growth for your company? Rapid growth is often accompanied by the need for more capital. Without strong credit scores, getting funds right when you need them can be a challenge.
Every credit situation is different and complex, so there’s no universal best way to raise scores. These five techniques, however, could help get your personal credit headed in the right direction — fast.
Decrease Debt Usage
It can come as a surprise that, if you have a credit card with a $10,000 limit and regularly use just $5,000 of that credit, you could be hurting your scores (or at least limiting your credit score potential).
Debt usage measures the amount of credit you’re using in comparison to how much you have on your various accounts. For most credit scoring models, a good rule of thumb is to keep your balances below 30% of your limit to avoid negative impact. In our case of the $10,000 limit, that would mean keeping your debt usage under $3,000. The consumers with the best personal credit scores keep their utilization under 10%.
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Your debt usage accounts for about 30% of your score (depending on the credit scoring model), so lowering your balances can make a big difference, and you could see that difference in as little as 30 days depending on your situation. If you’re making a big purchase and need to carry a high balance, try paying down the card balance right before your credit card provider reports your payment activity each month. This will generally be a few days after the end of the billing cycle, but it depends on the card issuer.
Ask for Help
Think of this as getting a fake ID for a young credit profile, but it’s 100% legal.
If you have a young credit history, you can add years to it if a family member is willing to add you as an authorized user on an older account with a positive payment history.
For this to work, you need to have a family member who is willing to lend a hand by adding you to one of their credit cards. That credit account will then be report on your credit report as an account for which you are an authorized user. The card account should be one that’s in good standing with positive payment history so that it will contribute positively to your score in addition to adding age to your credit profile. If you become an authorized user on an account with a spotty payment history or high utilization, you could be doing more harm than good.
Credit age accounts for about 15% of your total credit score, depending on the model. FICO says that individuals with the highest credit scores have, on average, an account that dates back 25 years. If your credit history is just a few years old, you may be behind the curve but you can add years to your account in a matter of days with this technique.
Work on Your Trouble Areas
Negative items like tax liens and collections accounts can really a kill a great credit score. Fortunately, there may be something you can do about these.
Tax liens can stay on your report for life if they go unpaid, and once they are paid they can stay for up to seven years. If you have a federal tax lien on your report, you may be able to get it released via the IRS Fresh Start program. Once it is released, you can then request to have it withdrawn, thus removing it from your report.
If you have or previously had an account in collections, it could be negatively affecting your account whether it is paid or unpaid. It’s not easy to get these removed, but you may be able to convince the collection agency to sympathize with your situation if the unpaid bill was an honest mistake. It never hurts to call and ask, though be aware that they may not be able to remove the item because of their agreements with the bureaus to provide accurate information.
Some newer credit scoring models are now ignoring paid collection accounts, so if you have an unpaid account on your report, it may be worthwhile to pay it off if your lender if using one of these newer scores for your loan application.
Keep in mind that if you check your credit reports and find negative items that you believe to be inaccurate, you can dispute these with the associated credit reporting agency. Once your dispute is filed, the credit reporting agencies must respond within 30 days under federal law (there are some small exceptions to that timeline).
Are there errors on your credit report? Check your personal and business credit reports with a FREE Nav accountso you can find and fix the errors that could be holding you back.
Add an Account
This sits at the bottom of the list because adding an account to your profile is often a longer-term strategy for taking care of your credit. If you’re a “credit ghost” (you don’t have any accounts reporting to credit agencies), however, adding a new account should be your first step towards building a good credit score.
Try getting a new credit card, and once your card is set up, be diligent about establishing a positive payment history. If you have no or bad credit, a secured card is one of your best options. These cards require a cash deposit, often equal to the line of credit being extended, that can be drawn on if you default on the card or miss a payment. Interest rates are higher for these cards than other unsecured credit cards, but generally you can graduate to a “normal” credit card after about 12 months of on-time payments with the secured card. Payment history generally counts for 35% of your credit score and carries the most weight in most credit scoring models, so it’s of utmost importance that you don’t miss payments!
Get Your Business Off Your Personal Credit
Using your personal finances to back your company is risky business. Businesses often take on much more debt than individuals do, and you could be left with significant personal debt should your business fail.
That’s why we always recommend that business owners separate their personal and business finances and establish credit in the name of the business. Start by getting a business checking account and a business credit card, and start paying bills under your business’s name. Moving your business purchases off your personal credit will also help you keep your personal debt usage down and protect your personal credit scores.
Try to make on-time payments on your business accounts. Payment history is the most important factor affecting your business credit scores as well, and strong business credit can help you qualify for low-cost loans and get better terms with your vendors and suppliers.
By building strong business credit and checking your personal credit reports with these areas for improvement in mind, you’ll soon shine in the eyes of lenders.
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