Key Takeaways
- Your personal credit plays a role in your business credit, so it’s best practice to focus on maintaining your finances in all areas
- Credit building accounts are called “tradelines”, which can be either “revolving” or “installment”
- Different types of tradlines should be used for different types of expenses
- Implement strategies low utilization and becoming an authorized user in order to increase your credit score
- Applying too frequently for tradelines can impact your credit score
- Applying for a loan through NEWITY does not impact your credit score
How Credit Works
Improving your credit score sounds like a daunting feat, but when you’re knowledgeable and strategic, it doesn’t have to be nearly as painstaking as it seems.
Let’s break down the best credit building options and how you can use them strategically in order to boost your score and improve your overall financial profile.
Let’s break down the best credit building options and how you can use them strategically in order to boost your score and improve your overall financial profile.
Personal vs. Business Credit
Your personal and business credit are measured on separate scales, but your personal credit does play a role in your business’s credit.
Your personal FICO credit score is on a scale from 300 to 850. The higher your score, the less credit risk you pose. This score takes into account payment history, credit utilization, credit inquiries, and more.
Your business credit score is called an SBSS score. This score can range from 0-300 and is informed by your personal credit as well as credit factors filed under your business’s name.
Because your personal credit affects your business’s credit, it is important to maintain good credit in all areas of your life, especially if you’re considering applying for business financing in the future.
However, do not just rely on your personal credit score to represent your business. The stronger your business credit score is, the more robust your overall financial profile will be, and the more opportunities you’ll have to qualify for favorable financing terms, open credit cards, and grow your business.
Your personal FICO credit score is on a scale from 300 to 850. The higher your score, the less credit risk you pose. This score takes into account payment history, credit utilization, credit inquiries, and more.
Your business credit score is called an SBSS score. This score can range from 0-300 and is informed by your personal credit as well as credit factors filed under your business’s name.
Because your personal credit affects your business’s credit, it is important to maintain good credit in all areas of your life, especially if you’re considering applying for business financing in the future.
However, do not just rely on your personal credit score to represent your business. The stronger your business credit score is, the more robust your overall financial profile will be, and the more opportunities you’ll have to qualify for favorable financing terms, open credit cards, and grow your business.
Set Up Your Business Credit
If you have not already, you need to start establishing your business’s credit as a separate entity from your personal credit.
Get a DUNS number from Dun & Bradstreet. This is a unique 9-digit number used for credit reporting. This will allow all your credit-building activities to be directly associated with your business.
You should also apply for an EIN number with the IRS. This number identifies your business when you file your taxes, open business bank accounts, apply for business licenses, and more.
Finally, ensure that you have established business financial accounts that are entirely separate from your personal accounts. This means having a business checking account with a debit card only used for business transactions.
You should also apply for a business credit card. Use this card to make necessary purchases for your business, things like weekly inventory and regular necessities, and pay it off on time. This is an easy way to build your credit score while making the necessary purchases you would be making regardless.
Get a DUNS number from Dun & Bradstreet. This is a unique 9-digit number used for credit reporting. This will allow all your credit-building activities to be directly associated with your business.
You should also apply for an EIN number with the IRS. This number identifies your business when you file your taxes, open business bank accounts, apply for business licenses, and more.
Finally, ensure that you have established business financial accounts that are entirely separate from your personal accounts. This means having a business checking account with a debit card only used for business transactions.
You should also apply for a business credit card. Use this card to make necessary purchases for your business, things like weekly inventory and regular necessities, and pay it off on time. This is an easy way to build your credit score while making the necessary purchases you would be making regardless.
Types of Credit
Credit building mechanisms are called “tradelines.” These are the accounts that appear on your credit report. There are two types of tradelines: installment and revolving.
Installment tradelines are accounts in which you reserve a fixed installment of money. This includes all types of loans in which you are given money that you pay back over an established period of time.
Revolving tradelines are variable borrowing accounts in which you are given a credit limit that you must adhere to. Credit cards and lines of credit are considered revolving tradelines.
All types of credit can improve your score as long as you use them accordingly and wisely.
Installment tradelines are accounts in which you reserve a fixed installment of money. This includes all types of loans in which you are given money that you pay back over an established period of time.
Revolving tradelines are variable borrowing accounts in which you are given a credit limit that you must adhere to. Credit cards and lines of credit are considered revolving tradelines.
All types of credit can improve your score as long as you use them accordingly and wisely.
What are the Best Uses for Different Types of Credit?
Credit Cards
Credit cards are great credit building tools to use for typical daily or weekly expenses. Ensure that you are not spending money on your credit card that you do not have in your bank account, as late payments will not only decrease your credit score but also rack up large amounts of high-interest debt.
If your credit score is too low to qualify for a traditional credit card, consider a secured credit card. These cards are much easier to obtain, as they require an initial cash deposit upon opening. This cash deposit serves as your credit limit and also collateral on your card in the event that you do not pay it off on time.
Secured credit cards are reported on your credit report in the same way traditional “unsecured” credit cards are, so you can use them to build credit all the same.
The downfall of secured credit cards is that they do not offer the same benefits and rewards that unsecured credit cards do. Secured cards are a great option for initial credit building, and once your score is high enough to qualify for an unsecured credit card, you can switch to one that will give you points and rewards on categories that you often make purchases in for your business.
For example, if you run a restaurant, a credit card that offers 3x points on all grocery purchases would be an excellent option for your business.
If your credit score is too low to qualify for a traditional credit card, consider a secured credit card. These cards are much easier to obtain, as they require an initial cash deposit upon opening. This cash deposit serves as your credit limit and also collateral on your card in the event that you do not pay it off on time.
Secured credit cards are reported on your credit report in the same way traditional “unsecured” credit cards are, so you can use them to build credit all the same.
The downfall of secured credit cards is that they do not offer the same benefits and rewards that unsecured credit cards do. Secured cards are a great option for initial credit building, and once your score is high enough to qualify for an unsecured credit card, you can switch to one that will give you points and rewards on categories that you often make purchases in for your business.
For example, if you run a restaurant, a credit card that offers 3x points on all grocery purchases would be an excellent option for your business.
Lines of Credit
A line of credit is a fixed amount of money that a borrower gets approved by their bank to borrow and repay as needed. This is very similar to a credit card, except the borrower borrows the money by writing a check or using their debit card.
The borrower pays interest on the amount borrowed.
It is best to reserve a line of credit for larger purchases that are not as predictable as weekly restocks but are not as large and pre-planned as projects you’d take out a loan for.
Lines of credit are to be used on an as-needed basis. For example, if you’re a contractor, a line of credit can be a helpful option to make an up-front purchase of lumber and drywall when you’ve been hired for a big project in which the client will pay you in installments over several months.
In contrast, when you have a small project in which you need $500 worth of materials and the client will pay at the end of the week, it is smarter to use your business credit card.
The borrower pays interest on the amount borrowed.
It is best to reserve a line of credit for larger purchases that are not as predictable as weekly restocks but are not as large and pre-planned as projects you’d take out a loan for.
Lines of credit are to be used on an as-needed basis. For example, if you’re a contractor, a line of credit can be a helpful option to make an up-front purchase of lumber and drywall when you’ve been hired for a big project in which the client will pay you in installments over several months.
In contrast, when you have a small project in which you need $500 worth of materials and the client will pay at the end of the week, it is smarter to use your business credit card.
Loans
Whereas credit cards and lines of credit are revolving tradelines, loans are installment tradelines.
Credit cards and lines of credit are great options for businesses making regular or semi-regular payments in which they need access to credit on an as-needed basis.
Loans are for larger, one-time purposes that credit cards and lines of credit would not be able to cover.
If you’re looking to purchase new equipment to start expanding your services, you want to renovate your brick-and-mortar shop, or you’re just wanting to free up your cash flow to bridge the slow season, a loan is the right choice.
Loans come with a fixed repayment schedule and often have lower interest rates than those on a credit card, especially SBA-backed loans.
Credit cards and lines of credit are great options for businesses making regular or semi-regular payments in which they need access to credit on an as-needed basis.
Loans are for larger, one-time purposes that credit cards and lines of credit would not be able to cover.
If you’re looking to purchase new equipment to start expanding your services, you want to renovate your brick-and-mortar shop, or you’re just wanting to free up your cash flow to bridge the slow season, a loan is the right choice.
Loans come with a fixed repayment schedule and often have lower interest rates than those on a credit card, especially SBA-backed loans.
What Are Some Strategies You Can Employ to Use These Credit-Building Tools Wisely?
Pay On Time
Whether it’s revolving credit or paying off a loan, timely payments will make or break your efforts to build better credit.
Set payment reminders and write them on your calendar.
When it comes to credit card payments, you can even get into the habit of making weekly payments on your balance to not only make payments on time but also ensure you are not spending more money than you have.
Set payment reminders and write them on your calendar.
When it comes to credit card payments, you can even get into the habit of making weekly payments on your balance to not only make payments on time but also ensure you are not spending more money than you have.
Low Utilization
Your utilization rate is the percentage of your total credit limit that you’re using on any revolving tradeline you have.
For example, if you have a credit card with a $10,000 credit limit and you used $2,000 in one month, your credit utilization for that billing period was 20%.
Credit utilization is reported on your credit score. If you have a high utilization, this is considered a signal that you are relying too heavily on your credit to make purchases.
A good rule of thumb is trying to keep your utilization rate below 30%. If you find yourself consistently exceeding that utilization rate each month, consider requesting a higher credit limit. This will allow you to spend what you need to without increasing your utilization rate and potentially affecting your credit score negatively.
For example, if you have a credit card with a $10,000 credit limit and you used $2,000 in one month, your credit utilization for that billing period was 20%.
Credit utilization is reported on your credit score. If you have a high utilization, this is considered a signal that you are relying too heavily on your credit to make purchases.
A good rule of thumb is trying to keep your utilization rate below 30%. If you find yourself consistently exceeding that utilization rate each month, consider requesting a higher credit limit. This will allow you to spend what you need to without increasing your utilization rate and potentially affecting your credit score negatively.
Become An Authorized User
If you have poor or limited credit history, you may want to consider becoming an authorized user on someone else’s credit accounts.
If you have a trusted family member, friend, or even business partner that would be willing to add you as an authorized user on any of their trade lines, you can start building your credit through their accounts.
If you have a trusted family member, friend, or even business partner that would be willing to add you as an authorized user on any of their trade lines, you can start building your credit through their accounts.
Credit For Utility Payments
Consider connecting your automatic monthly payments to your credit card for things like electricity or rent if applicable. This is a great way to build credit and earn rewards on money you need to be spending anyway.
Limit Your Applications
When you apply for a tradeline, whether it’s revolving or installment, this triggers a credit inquiry.
A credit inquiry is when a lender, creditor, or other authorized party requests to view your credit report in order to assess your qualification for the tradeline you are applying for.
Credit inquiries can be considered either “hard pulls” or “soft pulls.” While a soft pull has no effect on your credit, a hard pull is added to your report and slightly lowers your credit score for a short period of time.
This has only a minor effect, and your score bounces back after a few months. However, submitting several tradeline applications within a short period of time can have a much greater impact on your credit score. Additionally, some credit cards automatically deny your application if you’ve had multiple hard inquiries reported within a set period of time.
Hard inquiries occur with several types of applications, including:
A credit inquiry is when a lender, creditor, or other authorized party requests to view your credit report in order to assess your qualification for the tradeline you are applying for.
Credit inquiries can be considered either “hard pulls” or “soft pulls.” While a soft pull has no effect on your credit, a hard pull is added to your report and slightly lowers your credit score for a short period of time.
This has only a minor effect, and your score bounces back after a few months. However, submitting several tradeline applications within a short period of time can have a much greater impact on your credit score. Additionally, some credit cards automatically deny your application if you’ve had multiple hard inquiries reported within a set period of time.
Hard inquiries occur with several types of applications, including:
- Applying for a loan (personal, business, student)
- Applying for a mortgage or home equity loan
- Applying for an auto loan or lease
- Applying for a new credit card
- Requesting a credit limit increase (sometimes)
- Financing furniture, electronics, or appliances
- Applying for lines of credit
- Equipment financing or leasing
Does Applying for an SBA 7(a) Loan Require a Hard Credit Inquiry?
Many SBA lenders and facilitators do perform hard pulls on your credit report when applying for a loan.
However, at NEWITY we perform a soft pull for all loan applicants, so you don’t have to worry about your credit being impacted upon submitting an application.
The road to better credit may seem strenuous now, but by taking the proper steps and staying organized, you can see a huge increase in your credit report after just a few months.
If you’re interested in learning how much you’re qualified to receive through an SBA 7(a) loan with your current credit score, submit an application today!
However, at NEWITY we perform a soft pull for all loan applicants, so you don’t have to worry about your credit being impacted upon submitting an application.
The road to better credit may seem strenuous now, but by taking the proper steps and staying organized, you can see a huge increase in your credit report after just a few months.
If you’re interested in learning how much you’re qualified to receive through an SBA 7(a) loan with your current credit score, submit an application today!
Find out how much you could qualify for today!
