Marisa Barrera of Accion shares some thoughts about credit scores and credit reports and how they can help you make your business loan-ready.
Most new businesses will require a loan to start up and maintain working capital. In order to obtain a loan, you’ll need to be aware of your credit score and your credit reports. Building your credit record for a new business may pose a challenge if your business has never applied for credit before.
It feels like a vicious cycle – can’t get a loan because you don’t have credit, but you don’t have credit because you can’t get loans. Here’s the good news: there are lots of ways you can buff up your credit to become loan ready.
1. Pay Your Bills On Time
When evaluating creditworthiness, lenders want to see a record of timely payments. If you demonstrate that you pay all your bills in a timely fashion, then they will infer that you will do the same with any loans that you take out with them.
Paying bills on time, each month, also saves you money in the long term. With timely payments, you avoid racking up costly late fees and avoid dings on your credit report that can result in higher interest rates.
2. Clear Up Past Credit Marks
What happens if one or more of your accounts has been sent to collections? This issue may make lenders wary of your responsibility in paying back debt.
Don’t worry, all is not lost if you’ve had some credit missteps in the past. Take action now to correct your issues by reaching out to any delinquent accounts in collection and repaying those debts in full.
In addition, remember that the credit bureaus make mistakes. If there’s a black mark on your credit report that shouldn’t be there, reach out to the bureaus and get it cleared up.
3. Shop Around
When researching financing options, it pays to take your time. Informed consumers research available options and take their time before making big decisions. By shopping around for the best available rate, you can save yourself hundreds, even thousands, of dollars over the life of your loan.
You’ll need to know what kinds of loans are available to you and what terms and interest rates you can expect. Shopping around will also give you a sense of how much work your credit report needs.
4. Be Selective About Who Pulls Your Credit Report
Multiple inquires from credit reporting bureaus can result in a lower credit score. Ensure that the only people who have access to “pulling” your credit are those you’re serious about using as a lender. By avoiding unnecessary inquiries, you can keep your credit score high.
There are two types of credit inquires. The first is called a “soft” inquiry. This is when a lender makes an inquiry for promotional purposes, such as for pre-approved cards or rates. The second inquiry is a “hard” inquiry. A hard inquiry is when a prospective lender accesses your credit report for the purpose of offering a loan or line of credit.
You should avoid initiating inquires that aren’t mandatory to secure a loan. Moreover, you should keep tabs on your credit report to ensure that any and all inquiries have been approved by you.
5. Report Suspicious Activity
If you see charges or accounts that you haven’t authorized, you need to contact the credit bureau and let them know about the discrepancy. Preventing credit fraud can keep your credit score healthy.
By the same token, make sure you recognize all the credit checks listed on your account. Ask the bureaus to remove any that you didn’t authorize.
6. Be Informed and Proactive
Building a credit record takes time, as does rebuilding credit that has taken a hit through collections, delinquencies, or judgments. The credit reporting process can also be complicated and isn’t always intuitive. Learn everything you can about how the process works so that you can take the best possible care of your credit.
You should learn how to read your credit report and interpret it. You should also be aware of how certain actions (or inactions) can impact your credit, both positively and negatively. This will also make it easier to spot and take care of fraudulent activity or unauthorized credit checks.
Finally, if you’ve had an issue with negative credit in the past, you should be working with a financial advisor to put together a plan to boost your credit going forward.
7. Obtain Copies of Your Credit Report
If you’re starting a new business, lenders will probably want to consider your personal credit before giving you a business loan. The law provides that all consumers have access to a free copy of their credit report each year. You are entailed to one free copy of your credit report, annually, from each of the three national credit bureaus: Experian, Equifax and TransUnion.
Order your own free credit online or by calling 1-877-322-8228. Once you receive your report, review it thoroughly for accuracy and completion. If there are any issues you note, then dispute the problems with the proper bureau in writing.
If you’ve been in business for a while, you’ll need to monitor your business credit report as well. Those aren’t free – they cost anywhere from $35 - $99.
The Bottom Line
When it comes to your loan readiness, you’re your own best advocate. Empower yourself to know how to understand your credit, read the reports, and address and correct any problems. Be proactive about your credit and get yourself loan ready!
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