The Best Ways to Improve Credit Score

The Best Ways to Improve Credit Score

Would-be borrowers often find out the hard way that the only thing standing between their business and a much-needed infusion of capital is a bad credit score. Here’s how you can make your business more attractive to lenders.

How Credit Scores Are Calculated

The Fair Isaac Corporation, or FICO, calculates credit scores based on five factors: payment history, balances owed, length of credit history, amount of new credit and the types of credit used. Two factors, payment history and balances owed, comprise 65 percent of your score; therefore, doing these two things consistently establishes a healthy track record and a good score.

The score itself is a three-digit number, and higher scores are better. Lenders treat low scores with caution, as they generally indicate a history of late payments, maxed-out credit lines and possibly settlements, judgments or bankruptcy. Average scores begin at 650 while good scores begin near 720; businesses with scores lower than 650 may find it difficult — if not impossible — to secure affordable financing.

Improving Your Score

Although unscrupulous credit “repair” organizations would say otherwise, FICO, the National Foundation for Credit Counseling and other reputable organizations observe that fast ways to improve your credit score always begin and end with paying bills on-time and as agreed. Avoid maintaining balances above 50 percent of your total available credit.

Also, don’t take out too many new loans at one time as lenders may view this as a quick way to get in over your head in debt. Maintaining a mix of credit, including both secured installment loan as well as unsecured revolving credit lines, helps as well.

Finally, although closing out that unused line of credit is tempting, it works to your benefit to keep it open. Lenders prefer customers that maintain long banking relationships.

Why Good Credit Is Important

Good credit matters because lenders like to reward those with high scores with the most favorable loan terms. For example, imagine you’d like to take out a commercial property loan to build a new factory. Even an average-credit loan will cost several percentage points higher than its less-risky, good-score counterpart. Unfortunately, this may make the loan’s payment unworkable — as well as your new factory plan.