The legend of the Holy Grail dates back thousands of years. According to the legend, there is a “grail” (usually described as some type of cup) that is so powerful and so important that many people spend their entire lives pursuing it. The benefits of holding onto the grail are wide ranging; eternal youth, unlimited happiness, and perpetual wealth are just a few of the things that make this grail so enticing.
While it may not be able to provide you with eternal youth, your credit score is something that can directly lead to wealth and happiness. Like the Holy Grail, having a good credit score is something that many people have devoted their lives to pursuing. Your credit score directly affects the likelihood a bank or financial institution will lend to you—without taking deliberate steps to improve your credit score, your pursuit of happiness will be significantly more difficult.
Improving your credit score is a great and noble quest. While you may not encounter any dragons or mythical beings along the way, you will need to deal with lenders, intermediaries, and—in some cases—collection agencies (who may be even worse than dragons). But if you are willing to be brave, cunning, and relentless, the “Holy Grail” of a better credit score is likely well within your reach.
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- What is the Difference Between Personal and Business Credit?
- How to Build Your Personal Credit
- How to Build Your Business Credit
- About Strategic Capital
What is the Difference Between Personal and Business Credit?
A credit score is a broad concept that attempts to quantify the lendability of a specific entity. Entities—whether individuals or businesses—that have a proven history of paying their debts in full and on time will naturally be much more appealing to lenders than those who have not. If you have no credit history whatsoever, your score will probably be a bit lower than average. However, having a limited credit history is usually easier to resolve than having a bad credit history.
Underwriting business loans and underwriting personal loans involve fairly similar processes. The underwriter will carefully examine your credit history (which involves a bit more than just your credit score), compare your history to the amount of money you are asking for, and then determine an interest rate that appropriately compensates the risk of lending money to you. But while these processes are somewhat predictable, it will also be important to pay attention to the differences between personal and business lending.
In order to run a business, you will need to create a legal entity that can help separate the businesses activities from your own financial activities. These entities may take the form of a sole proprietorship (which is the “default” for single person businesses), a partnership, an S-Corporation, a C-Corporation, or other related enterprises. Once that entity has actually been created, it will be crucial to maintain a clear line between business and personal finances. Instead of taking place on a 300-850 scale (like personal FICO scores), business credit scores are typically reported on a scale of 1-100. Scores of 75 and above are considered excellent.
In general, individuals will be better protected from credit risks than businesses will be. These protections include things such as the CARD Act, better payment structures, and available assistance in court cases. However, by creating a separate entity, certain debts—and even bankruptcy—can be contained within the realm of your business. In other words, in the event that your business fails to pay its debts, you will not necessarily be disqualified from securing a mortgage in the future.
There is no doubt that your business and personal credit situations will be highly connected to one another. Improving your general
How to Build Your Personal Credit
The first step to improving your personal credit score is understanding each of the factors that are involved.
• Payment History (35%): past payments—such as mortgages, credit cards, car bills, utilities, and other bills—will have the largest impact on your credit score. In order to improve this component of your score, you will need to consistently make payments in full and on time. Settling outstanding debts and unpaid bills will also be necessary.
• Amount Owed (30%): your debt does not exist upon a binary; instead, your degree of indebtedness is measured upon a spectrum.
• Credit History Length (15%): when all else is equal, lenders prefer individuals with a longer and more in-depth credit history. This one of the reasons why young people typically have a less-than-perfect credit score.
• Credit Mix (10%): instead of having just a few credit cards, lenders will want you to develop a healthy “credit mix.” Balancing cards, mortgages, and utility bills can help mildly improve your credit score.
• Credit Inquiries (10%): if you are applying for credit all over the kingdom, lenders will naturally be concerned about your
As you can see, your payment history and the amount of money that you currently owe are the two most important components of your credit score. While the other components shouldn’t be ignored, most strategies for improving your credit score will focus on creating a better history and managing your current debts outstanding. Before you begin your long trek towards the grail, consider checking your credit score using Credit Karma, Free Credit Report, Annual Credit Report, Credit Sesame, or various other credit check providers. Personal inquiries are “soft” inquiries, meaning that checking your score will not have a negative impact on your score.
Once you have your score in hand, you will then want to settle any of your “negative” debts. This can include late payments, money owed to the IRS, accounts with collections agencies, accounts that have been over drafted, and various others. Many people have had outstanding debts that they’ve been ignoring for months or even longer. Depending on your current situation, restructuring your debts may be necessary. Though correcting these debts is surely not something you have been wanting to do, it will still be very important. Cleaning the slate will have a positive impact on both your payment history and the amount your currently owed.
After all negative debts have been removed (or at least have begun to be removed), you will also want to begin building positive credit. Credit comes in three primary forms, including revolving accounts (credit cards, etc.), lines of credit (usually provided by a bank), and installment accounts (mortgages, student loans, etc.).
If your credit score is currently poor, you will almost always need to pay a higher interest rate on any new source of credit you apply for. However, if you are able to pay all of your bills before any interest has a chance to accumulate, having a high APR will not be a very big deal. What will make a major difference, on the other hand, is how you manage your credit moving forward. Whether you keep your existing accounts open (recommended) or apply for new credit, you will need to make sure that every bill is paid correctly.
In addition to these fundamentals, you should also consider the following tips:
• Avoid closing your accounts unless necessary: while you should try to limit the amount of credit cards you own, you should also be careful when closing pre-existing accounts. Since the average length of your accounts has a direct impact on your credit score, it is usually better to pay off old accounts while still keeping them open.
• Set up automatic payments: while you may be newly motivated to improve your credit scores, it will still be very easy for you to accidentally miss a payment. Unless you have a compelling reason not to, setting up automatic payments is one of the best ways to make sure all of your payments are being made on time. Some places will even offer a marginal discount for taking advantage of automatic payment options.
• Check your credit score on a regular basis: having knowledge of your credit score will always be a good thing. Checking on a regular basis will help illustrate how the things you’ve been doing have actually paid off. Additionally, both creditors and collectors make occasional mistakes—keeping an eye out for things that need to be corrected will minimize the damage that they have to your score.
• Increase your credit maximums: while this may initially sound counterintuitive, having high credit maximums—when done correctly—can actually improve your credit score. This is because creditors look at how much you have borrowed relative to the amount you are currently allowed to borrow (a ratio known as credit utilization). Having a large amount of “possible credit” that isn’t being utilized will make you appear to be a safer person to lend to.
• …but remember to limit your borrowing: after increasing your credit maximums, it will be very tempting to purchase a new coat of armor, a new steed, a new castle, or various other luxuries. However, doing this will negate (and even reverse) the benefits of extending your credit.
• Make early payments: by making early payments, you are indicating that you’re financially secure and are taking active steps to reduce your debt. This will reduce the amount you currently owe (30% of your credit score) and also decrease the total interest you pay on your debts over time. There may be a few loans that do not allow early payments, but these are exceptions, rather than the rule.
• Be proactive: life is unpredictable and there are plenty of different personal expenses that can emerge over time. You may find yourself in a situation where you are unable to pay all of your debts. If this does end up being the case, it will be much better for you to reach out to your creditors, rather than waiting for them to come to you. To your surprise, you may have a few options available that won’t impact your credit score.
• Don’t lose faith: most people who are trying to rebuild their credit score will have a lot of work ahead of them. If your score only improves by a point or two after the first month (or even happens to get worse), it can be very easy to lose faith and give up. But there is a reason why the Holy Grail is something so many people pursue; once you arrive at the end of your journey, you will realize that your hard work has paid off.
Clearly, this is a lot of information for anyone to take in. However, what ought to remain clear is that your credit score is something that can still easily be repaired. There is no credit score that is truly unsalvageable; though repairing poorer scores will require more work, there will still always be things you can do to make things better.
How to Build Your Business Credit
The first key to getting your business’ financial situation under control is separation. No matter what industry your business is currently operating in or however large your business might be, drawing a clear line between personal and business expenses will be absolutely necessary. Fortunately, drawing this line is actually much easier than most people initially assume.
Establishing your business a legal entity will usually involve a small amount of
• Limited Liability Companies (LLC) is an excellent option for small business owners who are hoping to minimize their tax obligations. LLCs can be used for sole entrepreneurs and other individuals with a very simple business structure. At a minimum, creating an LLC can create the sort of legal and financial separation you’ve been looking for.
• Partnerships: if you are starting your business with one or more other people, then a partnership might be the appropriate option. During the course of creating a partnership, be sure to strictly specify the rights and obligations held by each individual.
• S Corporations: these corporations are an ideal option for smaller businesses (less than 50 employees) that are still hoping to incorporate. While they are not subject to the same tax duties as C corporations, they are still able to enjoy various legal benefits.
• C Corporations: C Corporations do typically pay the highest amount of taxes (though there are many exceptions to this rule), but they are also recognized for offering the largest amount of financial separation. Most companies trading on the NYSE, for example, are classified as C Corporations.
The legal structure that is right for your business will depend on your overall size, your ownership claims, as well as your long-term financial objectives. Though it will be possible to restructure your business in the future, thinking ahead from the very beginning will make things a bit easier. Additionally, if your business has a complex structure (anything beyond a partnership), you will need to obtain an Employer Identification Number (EIN). Your EIN will act as a trackable number connected to your business and will make it possible for future lenders to take a look at your entire credit history.
Though banks and other institutions lending to businesses do not use the same formula as your personal FICO credit score, they do generally pay attention to the same fundamental variables. Things such as your business’ total payment history and your current level of credit utilization available will all be very important. Making an active effort to resolve outstanding debts and also make all payments in full and on time will be the clearest way for you to begin moving forward.
As is the case with building your personal credit score, building your credit score will take a considerable amount of time. Unlike a trip to the mythical Holy Grail, your progress will be very easy to tangibly track. In fact, there are many things you can to immediately improve your business’s general amount of lendability.
• Create separate business infrastructure: in addition to establishing your business as its own legal entity, you will also want to open a separate checking account and establish a dedicated phone line. This will also help your business project a more professional image for your business.
• Use a credit card for common expenses: having a business credit card that you use on a regular basis is one of the surest ways to develop your credit history. Even if this card is only used for minor purchases, it will extend the length of your credit history and make you appear more lendable.
• Make sure you are getting “credit” for making your payments: only payments reported to the credit bureaus will have a tangible impact on your perceived lendability. Because of this, you should choose a lender that makes active reports. You should also ask your suppliers if they can begin reporting your payments as well—this will allow you to build a positive history more quickly.
• Be disciplined: at the end of the day, building your business credit will be all about taking control of your finances. Missed and late payments, overspending, and misuse of company credit cards are all common mistakes that can be easily avoided. As long as you can continue to keep everything under control, your business’ financial situation will continue to improve.
As is the case with your personal credit situation, business owners should also actively monitor their business credit scores (1-100) to make sure that everything is accurate. Business owners should also look for opportunities to make their payments early, when allowed. This will have a positive impact on your Dun & Broadstreet PAYDEX Score, which is one of the most frequently looked at scores for lenders.
There are plenty of reasons why your business will want to take immediate action to improve its credit score. By doing so, you will be able to access loans with lower interest rates, making the benefits of expanding your business comparatively greater. But, perhaps even more importantly, your business will begin to look much better on paper. For any business owner who aspires to be acquired by a larger organization, this will be very important. Whether you are being acquired by a company or an individual, having a solid credit history will immediately improve the sticker value of your business. Depending on the size of your business, this positive impact may be worth several million dollars.
Unlike personal credit scores, checking your business credit score will typically require a payment. Dun & Broadstreet, Equifax, and Experian offer three of the easiest ways for you to check. Because your business credit score has such a large impact on your business’ general financial health, paying for these scores will justify the ($40+) cost.
The great philosopher Lao Zi once wisely said, “A journey of a thousand miles begins with a single step.” As you begin your long journey towards building a higher credit score, there will certainly be a lot of work that needs to be done. However, by being proactive and trying to gain control of your credit situation, you are one step closer to the Holy Grail of financial security and prosperity.
There are a few things that are unique about personal credit practices and business credit practices, including consequences of low scores, reporting protocols, and various forms of protection. But in general, the principles of
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