Would you give money to anyone that comes asking for it? On what basis would you decide who you want to lend money to? For a bank, your credit score is a way to trust you, financially. But there’s more to that than just a trust factor. In this post, we explain everything you need to know about your credit score and why it is important for your small business.
Understanding Credit Score
A credit score is a number that ascertains your creditworthiness. It is a three-digit number that allows banks and other non-banking institutions to evaluate how likely you are to repay your debt. Credit scores usually range between 300 and 850.
A credit score is based on your credit report. It predicts risk for banks and other NBFCs.
How are credit scores calculated?
There are multiple scoring models that calculate your credit score, but FICO is the one that is the most widely used. Lenders use FICO credit score to determine your credit risk.
The major credit bureaus like Equifax, Experian and TransUnion collaborated to create VantageScore to provide more scoring consistency. They use criteria like the frequency of your payments in time and how many accounts you have in good standing.
These three credit bureaus use both the FICO score and VantageScore to calculate your credit score.
Even though there are many scoring models, most typically use this data :
- Your payment history
- Number of credit cards you have
- Types of loans you’ve borrowed
- Duration of your loan
- How much you borrowed
- Credit card limits and limit usage.
Why is credit score important to you?
As a business owner, it is important for you to maintain a good credit score because it determines:
- If you will get a loan.
- The interest rate on the loan.
A good credit score will help you access larger amounts of capital and also get a lower rate of interest. A good credit score is also important for you to get trade credit. Trade credit is the ability to buy now and pay later which will help solve cash flow problem. It will let you buy inventory, equipment without paying upfront.
How to maintain a good credit score?
A good credit score is 700 and above. Here are a few ways through which you can maintain a good score:
- Pay your EMIs and credit card bills on time.
- Don’t go overboard your credit limits.
- Keep your debts low.
- Monitor your joint account loans.
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