Having excellent credit means your franchise's financial future will be easier, and you'll have more options when it comes to shopping around for lenders. Shopping for a business loan? Excellent credit means you can snag a loan with a competitive rate that will save you thousands over the span of your loan. Even opening a business credit card with a terrific rewards program will only take seconds, and you can pick and choose which one best suits your franchise and your lifestyle.
On the other hand, not paying attention to your credit means these things will cost you more. Find out what credit mistakes will hurt your chances of getting a business loan in the future.
Not paying bills on time
Recently, FICO (the company that calculates your credit score) made changes to how they calculate your score. They now take your utility bills into consideration (e.g., cable, cell phone, electric and gas). This means paying bills on time is crucial.
If you pay your bills late, it can trigger higher interest rates on credit cards and late fees, and if your payment is more than 30 days late, the three major credit bureaus are usually notified. All of these things can decrease your credit score.
Tip: Use a personal finance aggregator to keep track of your bills, and set up alerts on your cell phone so you know when bills are due.
Your debt-to-income ratio is too high
Lenders frown upon having too much debt in relation to your income. A debt-to-income ratio (DTI) is also something that is factored into your credit score. It's calculated by dividing your total recurring monthly debt by gross monthly income.
Basically, it's calculated as a percentage, and if this number is too high, you'll get rejected for a loan. A DTI lower than 36 percent is preferable, although it depends on the lender.
Tip: Total up your debt (credit cards, student loans, etc.) and calculate your DTI. Create a plan to start attacking this debt aggressively and always pay more than the minimum balance.
Triggering too many credit inquiries
Having your credit pulled too many times will also lower your score. If you're about to apply for a business loan or mortgage, try not to do things like apply for a new credit card or finance a new car.
In general, it's not a good idea to trigger too many credit pulls, because these inquiries may stay on your report for up to two years.
Check your credit on a regular basis
Check your score three times a year through AnnualCreditReport.com - it's free. In addition, your credit card issuer may offer this for free. Although scores vary, depending on the source, you can get a general idea of how your credit is looking.
Increasing your credit score isn't rocket science. Be responsible. Pay your bills on time, lower your debt and don't apply for things that will cause hard credit pulls, and you'll have an easier time securing a business loan for your franchise.