Updated: Nov 22, 2019
In 2008, Jason Varley found himself in a situation many others were experiencing; with the economy hurtling towards the doldrums, people were spending less, so he was making less. At the time, Varley had two jobs: he helped celebrities and movie studios organize events and throw parties, and he bought used cars, fixed them up and resold them at a profit. When the economic dip commenced, parties and cars became nonessentials. Varley’s intake could no longer pay the bills.
Varley had a credit card for business expenses – he’d use it to buy the necessary parts to fix up the used cars, and pay off the balance once he’d sold the cars. As his cash supply dwindled, however, he began using the card for day-to-day living. “It gets easier and easier to do that,” he shares. “My card eventually maxed out, I missed payments, and my credit took a nosedive.”
Varley managed to reverse his fortunes with time. He began making furniture out of reclaimed wood, picked for free in his neighborhood, and sold the pieces on Etsy. He roused an old interest, launching Jason Varley Drumming to offer lessons to adults and kids. As he started to bring in a regular income, he was able to take the steps needed to repair his credit. “It probably took five years before I even thought about getting another credit card,” Varley says. Today, he only uses the card for bills, and pays off the balance every month. He is adamant he’ll never find himself in his prior situation again.
Like Varley, many small business owners suffer when their personal credit is sub-par. “When you’re starting a business, your personal credit is the business credit, just as your reputation is the business’ reputation. It’s no different.” So says Christopher Smith, founder and president of PeerPoint Solutions, an IT-centric staffing agency in Winston-Salem, North Carolina.
While there is no quick fix for repairing a credit score, adopting a few conscious practices can get you there with time, and improve your chances of getting a loan at a competitive rate.
Start by paying down your debt to less than 30% of your total credit available. This is the ideal ratio of debt to available credit. Even if you pay off your card in full every month, it is still important to use only 30% or less of your total credit. If you’ve had to use more, consider making more than one payment that month, to keep a better ratio.
Making payments on time is extremely important. It accounts for 35% of your credit score. If you’re prone to missing due dates, setting up automatic payment through your bank or directly with the creditor, is an easy way to ensure timeliness.
Credit reports are not immune to errors. Check your reports from all three bureaus periodically, to confirm the accuracy of the information captured. If you spot any mistakes, file a dispute with the reporting agency. Confirmed errors will be corrected, and could result in an increase to your credit score. For example, make sure the credit limits listed on your reports are up to date, especially if the reports reflect a lower amount than is actually the case. The more credit you have available that you aren’t using, the better your score will be.
If you’ve been diligent with your credit for years, but had a short stint where you couldn’t make payments on time, you may be able to leverage your history with the creditor, to have the negative reports removed.
Closing an account will not take it off your credit report. In fact, if you close the account because you’ve finished paying it off, you may hurt your report by lowering the total amount of credit you have available.
Opening several new accounts within a short period of time, may look like you’re desperately seeking credit; it could lower your score and serve as a red flag to potential lenders. If you do need a new account, take advantage of offers for which you’ve been pre-approved. Pre-approved credit card inquiries are considered “soft inquiries” by the credit reporting bureaus and will not affect your score. Be sure to read the fine print, however, to make sure you understand the terms and APR.
Buy something on installment or otherwise apply for a different type of credit besides the revolving credit of a credit card. Credit diversification can improve your score, as long as you’re able to make the payments.