Dispelling Credit Score Myths For Small Business Owners

Knowledge is power, especially when it comes to your credit score. For small business owners, understanding credit scores is crucial. It can be a make-or-break factor. Your credit score impacts your ability to secure financing, lease equipment, and even negotiate contracts. However, myths and misunderstandings often cloud the realities of credit scoring, leading small business owners astray. 

Myths And The Truth

Myth: Personal And Business Credit Scores Are The Same

One of the most common misconceptions among small business owners is that personal and business credit scores are the same. In reality, these are two separate scores, each based on different criteria. Your credit score is based on your personal credit history, including credit cards, loans, and mortgages in your name. Your business credit score is based on your business’s credit history, including business loans and lines of credit.

Having a separate business credit score is essential because it helps lenders evaluate your business’s creditworthiness without affecting your personal credit score. It also allows you to build a strong credit profile for your business, which can be beneficial when applying for business loans or financing. This not only helps you track your business’s creditworthiness but also protects your credit in case your business runs into financial difficulties.

Myth: Checking Your Credit Score Will Lower It

Another common myth is that checking your credit score will lower it. This is not true. Checking your credit score is considered a “soft inquiry” and does not impact your credit score. Soft inquiries are inquiries that you initiate, such as when you check your own credit score or when a lender pre-approves you for a credit offer. These inquiries are not visible to lenders and do not affect your credit score.

However, “hard inquiries” from lenders, which occur when you apply for credit, can temporarily lower your credit score. It’s essential to be aware of the difference between soft and hard inquiries and to limit hard inquiries when possible to avoid negatively impacting your credit score.

It’s a good idea to check your credit score to monitor your financial health regularly. You can request a free credit report once a year from each of the major credit reporting agencies (Equifax, Experian, and TransUnion) to keep track of your credit standing.

Myth: Closing Old Accounts Will Improve Your Credit Score

Some small business owners believe that closing old accounts will improve their credit scores. In truth, closing old accounts can actually harm your credit score. However, the length of your credit history is an essential factor in calculating your score. Closing old accounts can shorten your credit history, which may actually lower your score.

Instead of closing old accounts, consider keeping them open and using them occasionally to keep them active. This can help maintain a longer credit history and improve your credit score over time.

Myth: Paying Off Debt Will Immediately Improve Your Credit Score

While paying off debt is a positive financial step, it may not immediately improve your credit score. Other factors, such as your payment history and credit utilization ratio, also play a significant role in determining your credit score.

Paying off debt can lower your credit utilization ratio, which can have a positive impact on your credit score. However, it’s important to continue making on-time payments and managing your credit responsibly to see improvements in your score over time.

Myth: You Need To Carry A Balance On Your Credit Cards To Build Credit.

Some small business owners believe that carrying a balance on their credit cards is necessary to build credit. However, this is not true. Making on-time payments is the most important factor in building credit, not carrying a balance.

In fact, carrying a balance can lead to unnecessary interest charges. It’s best to pay off your credit card balance in full each month to avoid interest charges and improve your credit score.

Credit Monitoring Frequency For Small Business Owners

Small business owners should ideally check their credit scores regularly to monitor their financial health. It’s generally recommended to check your credit score at least once a year, but for small business owners who rely heavily on credit or are actively seeking financing, checking more frequently, such as quarterly or even monthly, may be beneficial. Regular monitoring can help you identify any issues or errors early on and take steps to address them, as well as track your progress in improving your credit over time.

Credit Utilization Ratio For Small Business Owners

A good credit utilization ratio for small business owners is typically below 30%. This means that you are using less than 30% of your available credit. To improve your credit utilization ratio, consider these strategies:

1. Pay Down Existing Debt: Reduce your outstanding balances to lower your credit utilization ratio.
2. Increase Your Credit Limits: Ask your creditors for a credit limit increase if possible. This can lower your utilization ratio as long as you don’t increase your spending.
3. Use Credit Wisely: Try to keep your balances low relative to your credit limits. Avoid maxing out your credit cards.
4. Pay On Time: Ensure that you make all your payments on time to avoid late fees and penalties, which can negatively impact your credit utilization ratio.
5. Monitor Your Credit: Regularly check your credit report to ensure that all information is accurate and to track your progress in improving your credit utilization ratio.

Conclusion

Understanding credit scores is essential for small business owners. By debunking these common myths, you can make more informed decisions about managing your credit and improving your credit score. Remember to establish and maintain a separate credit profile for your business, regularly check your credit score, and manage your credit responsibly to build a strong credit history.