Understanding Credit

Business credit, like personal credit, is very important for smart business growth. In fact, if you are planning to apply for a business loan or grow your small business, the first thing you want to make sure of is that your personal and business credit are both in order.

You immediately start building your personal credit history when you get your first job or credit card. All the information goes into a profile, otherwise known as a credit report. And your credit history compiles every time you have a credit inquiry, change of address or job change. Over time, your credit report becomes a barometer for your ability to pay back debt.

A high credit score qualifies you for the lowest interest rates and the best prices on software, equipment and other large purchases. A low credit score can adversely affect your purchasing power, meaning you pay the highest rates and spend considerably more money on big ticket items than your high-scoring counterparts may have to.

Detailed Score Explanation

Your FICO score is calculated using information from your credit report on the day it is pulled. It is based on multiple factors such as:

Payment history - Information about the way you paid your credit accounts in the past, including late payments and bankruptcies.
Credit accounts - The number of credit accounts that you have and the different types of those credit accounts (e.g. credit cards, auto loans, etc.).
Credit usage - The amount of credit you are using, and the amount of credit still available.
Length of credit history - The number of months your credit accounts have been on your credit report.
Credit applications - The number of times you have applied for credit in the recent past.
Bankruptcies - The presence and age of bankruptcy records (if any) on your credit report.

With many lenders using credit scoring as a significant part of their loan process, it is extremely important to know the reasons that make your score higher or lower. In fact, knowing the reasons behind your particular score is more important than knowing your score itself. This knowledge enables you to proactively manage your credit so you can get better loans.

The negative and positive factors that go into developing your FICO score are based on actual data from your credit report. By improving your negative areas and continuing your positive actions, you will be able to improve your credit rating.

Factors Not Used

Factors that are NOT used in calculating your FICO score include age, sex, and race. These factors are excluded from credit scoring to eliminate bias and discrimination from the decision process. Only the information from your credit report is used to calculate your FICO Score.

Review Credit Report Regularly

Review your credit report regularly with all three reporting agencies, Experian, Trans Union and Equifax. Look for any inaccuracies, old accounts that are still listed as active and other questionable activity on your credit report. Be sure that key supplier relationships are listed and accurate. By regularly reviewing your credit you can be more comfortable when making big decisions which are impacted by a credit score.

Report Errors

If you find errors, contact the reporting agency immediately. Submit fixes in writing and include your business name and tax identification number on all correspondence. Copies of supporting documents should always be included but save the originals for your files. If the error is on the side of the vendor, contact them directly and ask them nicely to remove the mistake.

Contact one of the three national credit agencies for your free annual copy of your credit report:

Experian | 888-397-3742
Equifax | 800-685-1111
TransUnion | 800-916-8800
or visit
https://www.annualcreditreport.com/

Update Details

Any missing or dated information regarding your business is important. This could include such information as updated annual revenues, place of business address, etc. This can be important information when it comes time to applying for a loan. Notify all three reporting agencies in writing with the updates.

Pay Down Credit Cards

Personal or business, ideally your credit card balances should be at zero every month but if you do carry a balance, pay close attention to your interest rate. Most credit cards start at 16% and can go up to as much as 30% per year. At the average credit card debt of $7500 a year, you could be paying as much as $1500 a year in interest.

Pay Bills on Time

Paying bill by their due dates will positively impact your credit standing. It's better for your credit to consistently pay a minimum every month than to skip a month now and then and pay the balance in full. Timely payments reflect a history of responsible financial management.

Watch Open Number of Credit Cards

Maintain a small number of credit cards and close unused accounts. Creditors look at your potential for going on a spending spree and falling too deeply into debt. The more credit cards you have, the larger your debt potential.

Keep your debts reasonable. Financial experts agree that as a rule, non-mortgage debt payments should not exceed 10 to 15 percent of take home pay each month. If debts are higher than that, try and reduce them before applying for another loan.

Dunn and Bradstreet Reports

The Dun & Bradstreet Corporation is one of the world's leading suppliers of business information, services, and research. Its database contains statistics on more than 100 million companies in more than 200 countries, including the largest volume of business-credit information in the world. Often called just D&B, it is known for its D-U-N-S (Data Universal Numbering System) identifiers assigned to over 100 million global companies.

D&B's D-U-N-S numbers are used to identify businesses around the world. They are required for many US federal government transactions, so are widely used and assigned.

Just as you would pull a copy of your consumer credit report, it is a good idea to request a copy of you D&B report. A free report can be obtained at http://eupdate.dnb.com. Review it for accuracy and notify them of any errors you might find. You can call Dunn & Bradstreet at 866-314-6335 or contact them online at www.dnb.com.