Q:  I’m getting ready to start a business and know that I will need to apply for credit.  I don’t understand what factors impact my credit score.

A:  Understanding credit, admittedly, is not the easiest part of business ownership.  In my estimation, credit is a personal, financial asset that often times makes or breaks business start up and stabilization.  With it, even the most unlikely entrepreneurs can capitalize their dreams.  Without it, they are hamstrung.

Vikki Frank, Executive Director of the Credit Builders Allianceⁱ  (www.creditbuildersalliance.org) notes that “in today’s economy, access to safe and affordable financial services is increasingly determined by an individual’s credit score.”  Well stated, Vikki, because it is true.  A high credit score gives an individual access to mainstream financing, lower interest rates, access to the necessities of life including housing (rental included) and employment, and even insurance.  Conversely, no credit, low credit, or a “thin” credit file makes even the most well planned yet capital-needy individuals vulnerable to predatory lenders and all the negatives that go with them.  The sting of low credit is long lasting and painful unless you understand what comprises a credit score and how to improve it.

What’s in your score?  Here’s a rundown of how credit data impacts your score:

35% of your credit score is reflected in payment history on credit accounts with recent history weighted more heavily than the distant past.

30% of your credit score reflects the amount of debt you have outstanding with all creditors.  This means that if you use more than 25%-30% of your available credit, your score will be negatively impacted.

15% of your credit score is based on how long you have been a credit user.  In this case, a longer history is best only if you have made timely payments.

10% of your credit score is based on your attempts to obtain credit in the past few years.  This means that every time you fill out an in-store credit offering, it scores you down.  This is because it signals credit providers that you have been searching for credit.

10% of your credit score reflects the mix of credit that you hold including installment loans, mortgages, and credit cards. 

Remember – your credit report identifies accounts that are in collections, those that have been charged off, and patterns of making late payments for a 24 month time frame.  For example, if you made three payments late to a single creditor, each payment being 30 days late, your credit report will show 3 late payments over the last 12 months.  In the world of credit, the only payment that helps is one that is on time.

When an individual wants to learn more about their credit score and how others view their payment practices, I recommend going to www.myfico.com.  For a mere $15.95, you will be able to obtain a copy of your credit report from one of the big three reporting agencies (Equifax, Experian, TransUnion) along with a comprehensive breakdown of exactly how your credit behavior has impacted your score.  I tend to encourage entrepreneurs to pull the information prior to starting the business planning process even if they know they will not be applying for mainstream financing.  If they are seeking non-bank financing as provided by microloan organizations, although the credit score won’t be the only factor in underwriting the loan application, it does count.

Patti Lind is the co-founder and Executive Director of The Abilities Fund.  She is a recovering banker who advocates that credit be treated as a personal, financial asset. 

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ⁱCredit Builders Alliance (CBA) is an innovative organization in the microloan/microenterprise marketplace whose purpose is to help low and moderate income individuals currently served by non-traditional financial and asset building institutions build their credit and access conventional financing.  Prior to their existence, most microlenders were unable to report the good (and not so good) credit practices of their borrowers to Equifax, Experian, and TransUnion.  Today, many US microlenders are finally able to report the credit activity of their borrowers who, ultimately, learn to treat credit as a financial asset.