10 Mistakes That Can Damage Your Business Credit
How to protect the good credit that your company has built
Are you an entrepreneur currently running a business? Most of us have a dream to become self-employed and one of the ways we can achieve this is by turning our savings into real investments such as a successful business. Part of achieving a successful company is building the creditworthiness of the business itself.
A good business credit score comes with so many advantages such as low interest rates on business loans, lines of credit, business credit cards and supplier financing. In addition, a good score can get you higher credit limits, low insurance premiums and as attract more credit opportunities from lenders and existing suppliers.
However, not all business owners have a good business credit score. This is primarily due to committing small mistakes while working with their credit cards. These petty mistakes are committed unknowingly but when the report reaches the eyes of the business credit reporting agencies, they really damage your business’s credit score. Today, we are going to take you through 10 mistakes that can really hurt your credit score and show you how to avoid them for a better credit score for your business.
Co-signing Someone Else’s Loan
Co-signing any type of loan for a friend, a relative or any other close person could prove disastrous to your own business credit score in case the borrower fails to honor the terms of loan repayment. Whenever you co-sign any loan, remember you take partial responsibility on behalf of the borrower. In case the borrower in question fails to repay the term, your credit score for your business will automatically be affected negatively if you don't make the payments. This means that being a loan 'co-signor' every time is a potential disaster in the making.
To avoid being affected by this, you will have to very selective when deciding who you can co-sign a loan for. Find out the history of the borrower in terms of making payments and their financial ability to repay the loan. Also, go through the way the borrower is going to make the payments and determine whether it is a viable one or could be a problem for you in the near future.
Ignoring the Warning Signs of Your Credit Problems
Most of us spare very little time to check and cross-examine our credit reports. The majority of the entrepreneurs only wait for a yearly report. This is not what you are supposed to do when it comes to your credit reports. If you have time you should check your credit reports on a monthly basis to ensure that it is free from errors. The longer you wait, the harder it becomes for the errors to be corrected. The errors can be damaging to your report and may lead to a bad credit rating which does not reflect how you have been making your payments and so forth.
There are also warning signs that you should promptly act upon which includes only being allowed to make minimum payments, missing some payments, looking for zero-rated business credit cards and also running up and down in search of zero-rated balance transfers. These signs when ignored may really damage your credit score and one has to realize the trouble ahead and react accordingly.
Closing Old Credit Accounts
In your home, you may at times feel like disposing the old fashioned sneakers. This act won’t affect you in any way since you no longer need them in your line of shoes. However, this is not always the case when it comes to credit cards. If you decide to cancel the old credit cards, you are at risk of lowering your business credit score unknowingly. Why? It's due to the fact that such cards could be having a good history but now that you do away with them, you automatically remove the good years of credit that had contributed to the current good score that your business is having.
To avoid losing the good history of your payments and the good score that you currently have, you have to retain your old credit cards by keeping them open. Even if you pay off any credit card, do not close it no matter what as this could really hurt your business credit score.
Missing or Making Late Payments
One of the key factors used in determining your credit score is the history of payments that you make. How late or early you pay or forfeit paying your bills plays a very crucial role in determining your business credit score. Anytime you fail to submit your payments on time, it is a guarantee that your score is going to hit a new low. Most of us assume that missing two or three payments will not have as big an impact on their score. This is just a misconception since even a single payment can deny you a good credit rating and categorize you in the fair credit rating which is so unfortunate.
Therefore, it is always crucial to ensure that all the necessary payments your business is owed by either creditors or vendors are paid on time. Just in case you forget to make a particular payment to a certain supplier, you may engage them in a gentleman’s agreement by requesting that the missed payment not to be reported to the business credit reporting agency. Such a step shall save you from bringing your business credit rating down.
Maxing Out Your Cards
As an entrepreneur, one rule of thumb is that at no time should you max out your credit card. Doing so will automatically raise your credit utilization ratio. The higher the credit utilization ratio, the higher the risk of watering down your credit rating. Most of us have the assumption that even if we max out our business credit cards regularly, we always pay it off and thus it will not have any impact on our credit score rating. This is your interpretation but bureaus interpret a higher utilization ratio in a different mindset.
Credit agencies expect you to use only a portion of your credit limit. On average, one should only utilize at least 30% of the limit their cards have. Surpassing that is taken as an indication by banks that you are running into financial trouble. Just in case you see yourself using the credit card a lot, you may look for a debit card to use occasionally too. This is to ensure that your utilization ratio is low.
Failing to Use Your Credit
We have had cases in the past whereby some entrepreneurs have business credit cards but unfortunately, they do not use them. This is not the way a credit card should be used. This is because you need a credit history in order to build up your credit score. For the first six months, you need at least one account which is operating. On the other hand, you also need at least one transaction per month to be reported to the business credit reporting agencies. This is all made to make sure that the credit rating for your business shows that you pay on time on a monthly basis.
In order to make sure that at least one of your payments is reported to the bureau, we would advise that you automate one of the bills you pay monthly via credit card from your phone. This is a better way to using your business credit card once a month which will improve your score over time.
Sharing Your Credit Card Number
Whenever unknown people come asking for your credit card number, you should never ever disclose any information. Doing so could lead to identity theft. If you receive emails requesting for your name and credit number, what should hit your mind instantly is to run away or delete the message. These are scammers who can really harm your credit score by doing unauthorized transactions without your knowledge. Some may use your credit card to buy stuff only known to them and this can be so damaging bearing in mind that your utilization ratio may end up being too high which could damage your business credit scores.
When such a thing happens to you, immediately contact your credit card issuer for action to be taken before any damage is done. The golden rule, however, is that you must never give out any information regarding your credit card for the safety of your account and for the betterment of your credit score.
Incurring Too Many Expenses on Credit for Rewards
We all get excited whenever we hear that using your credit card will earn you cash back, rack up miles and so forth, right? Many of us end up being victims of the same. If you use your card for non-intended purposes, you should remember that you are only hiking your utilization ratio. The higher the utilization ratio, the harder it affects your credit score. Most of the entrepreneurs get so nervous about these offers because the deals sound too good to resist. Due to this, we end up being unable to pay off the debts incurred.
This is where the trouble begins.
If you are not sure about how you are going to pay off those debts just because you want some rewards, do not go for them. Do not buy the items that are coming with rewards. On the same note, it is worth remembering that if you fail to repay these debts on time, you will incur interest rates over time that you will also be required to pay. The late payments will really tumble your credit score and even bring it close to nothing. Our advice is, do not use your business credit card extravagantly chasing reward points unless you are sure that you will be able to offset the balances at the end of the month.
Opening New Credit Accounts Every Time
If you thought having a new credit account every time is a good thing, you should have changed your mindset as early as yesterday. You should not be a victim of every credit card company that comes up with their amazing offers. Opening too many accounts within a short period will always bring your business credit scores down whether you like it or not. How does it do that? First of all, it shortens your average account age by negatively impacting on your older accounts.
On the other hand, many inquiries will be made to the new accounts and this can equally affect your credit score negatively. To avoid the temptation of signing up for new credit accounts, you can mark any card offers as trash or spam so that you never be tempted to read them at any time.
Taking Too Long to Shop for the Best Rate
Many business owners usually prefer taking a long time when shopping for mortgage loans, auto loans, business loans, and many others. However, shopping for too long will be costly to your business since it lowers your credit score. This means that whether you are shopping for a mortgage, student loan or even auto loan, you are supposed to do it within a shorter period of time. This is because any hard inquiries made on your account for a period longer than 30 days will affect your score. Our advice is if you are going to shop for the best rate, take a shorter period of time.
The above mistakes can really damage your business credit scores if not taken into consideration. They may seem to be very easy but it takes a lot of sacrifice to adhere to them. Make it a habit and part of your plan to avoid making these costly mistakes that may hurt your business credit scores.