Why business owners should care about personal credit

Your credit score could make a huge difference in your life. In 2015, Credit Karma found that consumers with excellent credit scores of 750+ could pay $230,000 less in interest over a lifetime than consumers with scores between 300 and 639.

But did you also know that your personal credit could affect your ability to get funding for your business, too?

Whether you’re a small business owner or an entrepreneur with the next great idea, your personal credit can be an important factor in securing a business loan or getting credit from a vendor. Learn why your personal credit score matters.

Why is having good personal credit helpful to business owners?

While you and your business have separate credit scores, maintaining strong personal credit can be important if you’re looking for financing.

If you’re a sole proprietor, your personal credit report could be reviewed when you’re applying for a business loan. Your personal credit score may also be a factor in determining your business’s credit score.

Experian’s business Intelliscore Plus may incorporate your credit history into your business score, and Experian says these blended scores are best for predicting small-business risk. If business information isn’t available, the Intelliscore Plus is based entirely on your personal information. FICO’s SBSS product, used by the Small Business Administration, may also partially rely on your credit.

In addition, having good personal credit could help your business in more indirect ways. For example, good credit could allow you to get the cell phone plan you need without having to put down a deposit. It could also save you money on interest and insurance — money that you can then redirect into your business. Finally, good credit could give you the peace of mind of knowing you’re more likely to be approved for the funding you need at the interest rates you can afford.

Running a business is stressful enough — the last thing you’d want is for your personal credit to wreak havoc on your work-life.

How to build your personal credit

If you want to build your personal credit, keep the following advice in mind:

• Try to keep your credit cards’ balances below 30 percent of the card’s total credit line. Your credit utilization rate, which you can calculate by dividing your total balances by your total credit limits, is often a major factor used to calculate your score. Using personal credit cards for large business purchases can make this difficult, so you may want to limit business spending to your business credit cards or loans.
• Pay your credit card bills in full if you can. In addition to saving you money on interest, this can help keep your credit utilization rate low.
• Don’t miss a payment. Your credit score tells lenders how likely you are to repay debts in a timely manner, so missed payments may lower your score significantly. Setting up autopay for at least the minimum payment due can help ensure you stay on top of your bills.
• Review your credit reports and dispute major errors. According to a 2012 FTC study, one in four consumers identified errors on their credit reports that might affect their credit scores, so it’s important to regularly look over your reports and ensure they accurately represent your credit history.

How do your personal and business scores differ?

Business and personal credit scores were created with a similar goal — to help lenders determine how risky it is to lend money. In both cases, credit-scoring agencies use data found on credit reports, such as payment history and the use of credit lines, to determine a score. However, business credit scores may also take into account the business’s size and risks to the industry.

Just as consumers can have multiple credit scores, established businesses may have multiple business credit scores. The score ranges depend on the credit-scoring agency and scoring models, but higher is usually better.

Personal credit scores range from 300 to 850 for both Fair Isaac Corporation (FICO) and VantageScore 3.0 scores, the two most popular consumer credit scores. Business credit scores range from zero to 100 for Dun & Bradstreet (D&B) Paydex and Experian Intelliscore Plus scores, and zero to 300 for FICO’s Small Business Scoring Service (SBSS) score

Read more:What’s a small business credit score? And why does it matter?

Bottom line

Whether you’re applying for a mortgage or trying to take out a small business loan to open up a new bakery, your personal credit score matters. By taking the time to work on it now, you could save yourself a lot of hassle and money in the future. Good luck!

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