Even when you apply for a business loan, your personal credit is usually the basis for most commercial lending products. While there are some exceptions (check out our Unsecured Business Lines of Credit page for more information), you need good personal credit to obtain a business loan in most cases – especially if you are just starting your business. Here are some less common slices of wisdom to keep your credit on the up and up.
1. Keep Your Old, Unused Credit Cards Open
The average American has three credit cards. Even if you’re not using all the cards in your wallet, resist the temptation to call the credit card company and close an account, even if you’re not using the card.
Why?
Your level of credit utilization accounts for almost one-third of your credit score. If you lower your total credit limit by closing a credit card account, you are effectively lowering your total available credit – and thereby increasing your utilization. The ideal range for credit utilization is 10-30% of your overall available credit.
One exception to this rule is if your old, unused cards have high annual fees. In this case, it could make sense to take the temporary hit to your credit score.
2. Be a Good Tenant
Most people’s largest monthly expense is housing. In some instances, you can actually attribute your rent payments to your credit history. If you have a private, small-time landlord, they might not have the resources to report your payments to the credit bureaus. However, if you’re in an apartment building owned by a management company, you might be in luck. Some apartments regularly report rent payments to the credit bureaus.
Obviously, you only want to ask your landlord to report your rent payments if you’re good about paying your rent on time. Because if you tend to fall behind on rent payments, that can obviously hurt your credit score.
3. Mortgages for Homeowners
Never, ever pay your mortgage late. If you are having difficult financial times, prioritize payment to your mortgage over other debts. And always call your mortgage company to at least make a partial payment or arrange a plan with them. Missing a mortgage payment is extremely serious – and you could risk losing your home to foreclosure.
4. Never Become an Authorized User on Someone Else’s Credit Card
Another unconventional way to build credit is by becoming an authorized user on someone else’s credit card. But my advice is NOT to do so. While friends or family members might allow you to become an authorized user on their card, proceed with caution: By becoming an authorized user on someone else’s card, your credit score becomes intertwined with theirs. Both people’s payment activities will reflect on each other’s credit profiles… and late payments and other derogatory items could quickly translate into permanent damage to an important relationship.
Instead, try getting store financing (aka a store credit card, such as Lord & Taylor, Macy’s, Crate & Barrel, etc.) card to establish your own credit and to avoid unnecessary drama.
5. About Those Store Credit Cards
We have all been to a store that offers shoppers 20% off your purchase for signing up for a store credit card. Department stores are notorious for this. If you accept the offer, please know that a store credit card is like any other credit card. And usually have high APRs.
If you have even the smallest balance on one of these cards, you need to pay it off the same way you would with your Visa, MC, and AMEX credit cards. Late payments can accrue high interest and become delinquencies over time.
6. Ask for a Credit Limit Increase
We talked earlier about credit utilization (how much credit you’re using as opposed to how much available credit you have) and the role it plays in your credit score. The lower your utilization, the higher your score will be. If you increase your credit limit, then you have more wiggle room to keep your utilization on the lower side.
Call your creditor (or check their website) as you’ll need to provide some information, such as your annual household income. The process might also involve a “soft” credit pull, so there’s no impact on your credit score.
7. (Occasional) Late Payment Forgiveness
Nobody is perfect. We all try our best, but sometimes, payment deadlines slip our minds. Maintain a positive relationship with all your creditors. Call them, write them emails, ask questions… Credit card companies keep notes on you, which could pay off in the long run (if you happen to slip up), usually in the form of late penalty waivers. Or they might at least agree not to report a missed payment to the credit reporting agencies (CRAs).
Missing a payment can create a 100-point drop in your credit score overnight. And while it will have little impact on your credit score after two years, all late payments remain on your credit report… forever.
8. Check Your Credit Report for Errors
About 25% of Americans have errors on their credit report. Sometimes things as innocuous as spelling errors, name changes, or mistakes in your address can cause credit report errors.
Request your credit report from the CRAs at least once a year. Remember, pulling your own credit report has no impact on your credit score, so you could conceivably pull it every day with no impact on your credit.
And if you find a mistake on your report, you’re fully within your rights to dispute the error. The bureaus will review your claim and must remove inaccurate information within 30 days. Depending on the type of error, you might need to take things up with your creditor first, and then with the CRAs. Just note that fixing credit report mistakes can potentially raise your credit by hundreds of points.
9. Medical Bills
While most doctors and hospitals don’t report unpaid medical bills directly, they can absolutely affect your credit. Yet, unlike the decision to, say, buy a house or put a big purchase on a credit card, medical expenses often arise from circumstances the consumer does not control. And more recent credit score models have evolved to treat medical debt more leniently.
First, don’t prioritize medical debt over other debt. As pressing as it may seem, paying your medical bill instead of your mortgage or car loan will end up damaging your credit report a lot more than not paying your medical bill.
Second, don’t trade medical debt for other kinds of debt. The National Consumer Law Center (NCLC) warns against borrowing or using a credit card to cover health care bills. Medical debt generally does not carry late fees and requires low or no interest payments. Compared to credit card debt, it takes longer to appear on your credit report and is less likely to result in a lawsuit.
10. Be Proactive About Your Credit!
Almost all major credit cards have apps, which you can download and easily set up to provide you with timely reminders and helpful notifications to keep you on top of your spending. Most banks have apps too, which is another helpful tool to control your finances.
Hopefully, some of these tips and tricks will be useful for you and your business. First, make sure you take care of the easy and obvious ways to raise credit, like paying your bills and protecting your personal information. Then, if you incorporate some of the tips from the list above, your credit score could turn out to be even better.
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