Forming great habits puts us on the road to success.
As an entrepreneur, cultivating the right habits for managing your employees or working with clients can mean the difference between a productive and growing business and a distressed one.
Yet for many entrepreneurs, taking care of their credit scores is usually an afterthought. And by the time it becomes a top concern, such as when applying for a business loan or line of credit, it is already too late to quickly turn around.
So here are 7 essential habits to develop that will get you to a high credit score. Like developing all great habits, practicing this list on a consistent basis is probably the most difficult part. But once they are part of your routine you’ll be on track to never having to worry about bad credit ever again.
- Regularly check your credit score and history. It’s important that you check your credit score and history at least twice a year. This will help you catch mistakes and issues early so that you can address them. These days you have plenty of options to see your credit information for free. Annualcreditreport.com, for instance, is a website sponsored by the credit bureaus: Equifax, Experian, and TransUnion. It lets you download your credit report from all three agencies for free every 12 months. There is also Credit Karma, a private company that allows you to see your credit information in real time from TransUnion and Equifax also for free.
- Pay your bills ON TIME!This is actually the most important factor in calculating your credit score. Just one or two late payments can significantly impact your score. According to my FICO, a website from the developers of the FICO score, approx. 35% of your credit score is determined by your payment history. As an entrepreneur, if your business is in the fast lane then make sure to use auto pay on your bills so you don’t have to worry about missing any payments.
- Don’t use up too much of your credit. This is called your credit utilization rate. Here is a simple example. Your credit card company gives you a $5,000 credit limit; you spend $4,000 and pay off $500. Your available credit is now $1,500 and your credit utilization rate is 70%. This number is high. Most personal credit analysts’ recommend keeping your credit utilization rate around 30% to 40% of your total available credit. So, charge less and pay down your bills. The best thing to do each month is to pay off your statement balance.
- Avoid bill collections, tax liens, foreclosures and bankruptcies.These issues can stay on your credit report for 7 to 10 years. They are also ruinous to your credit score. Business lenders that see these bad marks in your credit history will always investigate them. Some will immediately turn your application down should the issues be within the last two years of your loan application.
- Build your credit history early and over time. Having a long credit history is a plus. Don’t close your old credit card accounts too quickly as your credit score receives additional points when you have managed open credit lines for many years.
- Don’t be overactive with opening new credit.Each time you apply for credit, you’ll typically have an inquiry with all three credit bureaus. This is called a hard credit pull. It will leave a mark on your credit report and affect your credit score. If you do it too often, it can shave points off your credit score fast. Lenders will also read it as an indicator that you are desperate for credit and it’s not a good sign. A hard credit pull happens when you apply for auto loans, mortgages, lines of credit, business loans, and student loans.
- Mix it up. Having a mix of credit is actually good for you. It demonstrates to the credit bureaus that you know how to manage debt. So don’t be afraid to have a credit card, installment loan, and mortgage. But don’t just apply for credit for the sake of your credit score make certain that you can afford the payments and that you need the money for a purpose.
There is really no “magic bullet” among these habits for building up your credit score. Like building a business, what seems like magic to the casual observer is actually the product of hard work, patience, and resilience. And it’ll take these same qualities to build up these essential habits and establish great credit.
Thank you to Ching Ryan for this guest post contribution. Ryan is the Chief Operating Officer of Simpler Funding. Simpler Funding empowers small businesses and startups with unbiased information, research and resources, and an easy to use platform to find, connect, and apply for funding.
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