Your credit score can play a huge role in the success of your business loan application. Here we look at what it is and what you can do to improve yours.
You may not know how much of an effect your credit score has on your life until you try to borrow money.
It’s at this point that you realise that lenders use your credit score to help them make their decisions. A good credit score can provide you with access to better loan features and low interest rates.
A bad credit score can reduce your borrowing power and restrict your access to loan features. At worst, it can prevent you from getting a loan entirely.
The problem with credit scores is that they’re not really a tangible part of your life. You don’t get to see the effect that your financial decisions have on your score. In fact, you have to ask, and potentially pay, to see the report in the first place.
In this article, we’re going to take a closer look at credit scores. By the end, you’ll know what they are, what factors affect them, and what you can do to improve your score in the new year.
As the name implies, your credit score is a numerical value. This number is a representation of your trustworthiness as a potential borrower.
Your score essentially compiles all of your credit history into a single figure. This gives lenders, like mainstream banks, or financial institution like Max Funding, the ability to conduct an at-a-glance examination of your record.
Your score will fall somewhere between 0 and 1200. A higher score demonstrates that you’re a trustworthy borrower. It shows the lender that you make loan repayments on time and aren’t likely to default on a loan.
Of course, a lower score shows the opposite. If your score falls in the low hundreds, lenders instantly become wary of you. They’ll likely take a closer look at the details of your credit history. At best, this means you face some delays when applying for financing. At worst, it means they’ll discover information that causes them to refuse your loan application.
Ideally, you’ll have a score of at least 600. Anything below that may see you run into issues.
Your credit score also affects the amount of money that you can borrow. Again, a lower score means you can’t borrow as much as somebody with a high score. You may also have to meet additional criteria when applying for a loan. Plus, some lenders may impose higher interest rates on the money that you can borrow.
Thankfully, you can find out your credit score before applying for financing. Several organisations, allow you to check your score. Typically, you can access your score a couple of times per year without paying a fee. After that, you may have to pay to see it again.
You may also hear the term “credit rating”. This is a synonym of credit score.
In 2020 you know the basics, you need to know the factors that can negatively affect your credit score.
They include the following:
Additionally, it’s possible that your partner’s credit history can have an effect on yours. If you hold any joint accounts and your partner defaults on a loan, it can negatively affect your score.
That covers the issues that can damage your credit score. Now, let’s look at a few tips for improving your score in the new year.
This is the simplest tip on the list. However, it’s also the most effective. If you keep up with your existing obligations, you improve your credit score. Consistent and on-time repayments show lenders that they can trust you as a borrower.
Missing a payment, even by a day, can have a surprisingly drastic effect on your credit score. Consider setting up direct debits for all of your loans and credit cards. This ensures that you don’t accidentally miss a repayment. To see how much you tax you need to pay, this handy calculator is a great tool.
We covered this a little above, but it’s worth expanding on here.
Keeping an account open after clearing it shows lenders that other providers trust you. Even if you don’t have a balance to clear, keeping the account open ensures your repayment record stays on the report.
It can be very tempting to send as many applications as possible when you’re trying to get a loan.
That’s a problem because lenders can see a record of every application that you make. If you make a lot of applications within a few months, your score will fall. This is particularly the case if all of those applications end in refusal.
Multiple applications paint the picture of someone who’s desperate for money. Many lenders will see this and assume that you’re not capable of handling your finances.
For your part, you should only apply for a loan or credit when you’re confident that you’ll get a good result. Stagger your applications so that you don’t end up with a chunk in a short time period.
You can’t fix your credit score if you’re not aware of the issues to begin with.
The good news is that checking your credit score doesn’t have an effect on the score itself. Try to check every three or four months. This helps you to keep track of how your financial dealings have affected the score.
There’s another benefit to checking your credit report. You may see inaccurate information on the report that you can appeal against. A successful appeal erases a negative mark from your report, which instantly boosts your score.
Diversifying your credit means showing lenders that you can handle several lines of credit at the same time.
For example, having a mortgage, credit card, and personal loans on your report shows that you can diversify.
The important point here is that you have to make all of your repayments on time.
Diversifying can cause serious problems if you can’t keep up. If that’s an issue for you, it may be better to consolidate your loans instead. This makes it easier to keep track of your credit.
You know better than anyone else which of these options works best for you. Diversification can reap huge benefits if you feel confident that you can handle several lines of credit. Consolidation works best if you want to make your repayments as easy as possible.
You need to understand your credit score before you apply for a loan. You now know the factors that affect your score and what you can do to improve it. Put these tips into practice today to improve your chances of getting a business loan.
Happily, you have options if you have bad credit but need a business loan right now.
Max Funding may be able to help you. Our bad credit business loans offer the following:
Apply online today to find out if you’re eligible for a bad credit business loan.
Tammy Richards is a seasoned finance writer with over 15 years of experience in the industry. With a keen eye for detail and a passion for helping people make smart money decisions, Tammy has become a trusted voice in the world of personal finance. Holding an MBA and drawing from her extensive entrepreneurial background, she offers valuable insights and practical advice to her readers.
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