X-Banker

Myths About Building Your Credit

I’ve heard it so many times, “I pay my bills on time, I have excellent credit.” Yes, paying your bills on time is very important; but, sorry, it does not guarantee excellent credit. Your payment history is only about one-third of your credit score. Other factors such as your debt levels, new credit and the length of your credit history make up the other 65%. It is entirely possible to pay all your bills on time and not have excellent credit. Even if you have a 700+ credit score, you may find yourself on the sidelines for financing if your ratios aren’t in line.

Two ratios in particular that we look at are your Revolving Debt Ratios and your Debt-to-Income Ratios. One sure score killer is maxing out credit cards — even those credit cards you are using for your business. Your revolving debt ratio is one of the most closely watched ratio in business lending and can have a dramatic impact on your credit score. Revolving debt includes credit such as credit cards and lines of credit.

If you must tap personal credit for your business, it’s essential that you choose business credit cards and loans that don’t report to your personal credit files. You may have to provide personal guarantees (PGs) and you may be subjected to personal credit checks, but don’t take on biz loans that will drop your scores. If you obtain the right business credit cards and loans, which we help all our clients obtain, you will be able to have thousands of dollars of credit that doesn’t report to your personal credit report. This will help you keep your revolving debt ratio in check and preserve your personal score by not loading it with a bunch of business debt. The fatal mistake made by too many entrepreneurs is that they load their personal credit with all sorts of business debt; then when they seek much needed financing they have no where to go – they’ve already torched their score.

Another ratio that needs to be closely watched is your debt to income. This ratio tells lenders how likely you are to service your debt. The lower the ratio the better. If you lack the right business credit cards and unsecured lines of credit, you may find yourself with a debt ratio that is out of line and that your ability to obtain financing is seriously crippled.