When applying for business credit some lenders look at your personal credit to get an overall financial picture of how you typically pay your credit obligations (monthly payments) on time or not. Let's review how your credit score is calculated. Let's first take a look at what a personal credit score and personal credit report are.
A credit score is a statistical number that evaluates a consumer's creditworthiness and is based on credit history. Lenders use credit scores to evaluate the probability that an individual will repay his or her debts. A person's credit score range from 300 to 850. The higher the score the more financially trustworthy a personal is considered to be. There are 3 main consumer credit agencies that report this number: Equifax, Experian, And Transition credit scores are created by Fair Isacc Corporation (FICO)
Personal Credit Report
A credit report is a detailed report of an individual's credit history. Credit Bureaus collect information and create credit reports based on that information. Lenders use reports along with other details to determine loan applicants credit worthiness.
5 Factors lenders look at when examining your personal credit report:
Payment History
35% of your credit score is based on your payment history. How you've paid your past credit obligations, how you pay your current credit obligations typically determines how you will pay your future credit obligations. This is the most important factor in calculating credit scores
Credit Utilization
30% of your credit score is based on your credit utilization. The second most important factor when determining your credit score is your outstanding debt. How much of your credit do you use oppose to how much you have available. For example if your credit card limit is $1,000 and the balance stays around $800 then your utilization is at 80%. Lenders like to see your credit utilization around 5%-10%
Length Of Credit History
15% of your credit score is determined by the length of time your accounts have been opened. Try and keep any credit cards active. Even if its small purchases. A long credit history provides a better overview of your financial behavior rather than someone who is just starting to build credit.
Types Of Credit
10% of your credit score is directly associated with the "type" of accounts you have. Having a variety of account types can improve your credit score and give lenders a broader view of how you use those different accounts. Account types would include: personal loan (I), Auto Loan (A), Home Mortgage (M), Credit Cards (R), and Student Loans (S)(I).
Number Of Credit Inquiries
10% of your credit score is based on how many times you have applied for credit. Having too many credit inquires (credit pulls) in a short period of time could indicate that you're in financial trouble and in need of credit (potential debt). The Fair Isaac Corp (FICO) recommends only taking on additional credit when absolutely necessary. If you ever find yourself "shopping around for best rates" do so within a 30 day window to reduce a drop in your credit score.
