Business Loans

Key Components Of How Personal And Business Credit Scores Are Calculated

Mar 09, 2022 • 10+ min read
small business credit score is calculated
Table of Contents

      When you apply for a lease, mortgage, credit card, or business loan, your credit score can seem like alchemy. Unless you monitor your credit report consistently—which is a good practice, by the way—there might not seem to be a discernible correlation between your borrowing habits and your score.

      Of course, if you’re an obvious credit risk—maybe you’ve defaulted on loans, for instance, or you‘ve hit the maximum spending limits on your credit cards—you probably aren’t surprised by a low score. However, you might be scratching your head if you are in the vast middle range of “fair” and “good” scores, wondering how exactly you get to “exceptional.”

      It isn’t magic. The 3-digit number that has a huge bearing on your life is decided by 5 different metrics.

      What is a FICO credit score?

      FICO, or the Fair Isaac Corporation, determines the creditworthiness of an individual with a number, typically between 300 and 850. This FICO credit score is the lending industry standard for making credit-related decisions.

      FICO scores are calculated from information pulled from the 3 major credit bureaus in the United States: Experian, TransUnion, and Equifax. These bureaus, in turn, gather information from lenders like credit card companies, student loan lenders, and banks.

      A score above 670 is generally considered “good,” and a score above 800 is considered “exceptional.” Only 21% of Americans have exceptional scores, while another 46% have scores above 670 but under 800.

      Your personal credit score can have a large impact on your ability to get a business loan, too. Banks typically want applicants to have credit scores above 800, but there are other options.

      FICO determines your credit score based on 5 factors, but each factor is weighted differently. Your repayment history and overall credit utilization are the main components of your score.

      5 components of your FICO credit score.

      1. Payment History

      FICO says that payment history determines 35% of your credit score, making this factor the most important aspect of your credit reports. The guiding wisdom here is that past repayment behavior is the best way to determine your ability to pay off new debts.

      “Both revolving credit (i.e., credit cards) and installment loans (i.e., mortgage) are included in payment history calculations, although installment loans take a bit more precedence over revolving credit,” financial expert Rob Kaufman of FICO writes. “That’s why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.”

      You can boost this portion of your score, and, therefore, greatly boost your FICO credit score overall, by paying down existing debts. One of the fastest ways to push your score skyward is to pay off a debt like a credit card completely. Even ensuring your payments are timely can have an impact, although paying above the minimum will compound your efforts to improve your score.

      2. Amounts Owed

      The next biggest factor FICO uses in determining your credit score is your “credit utilization.” As the term suggests, this metric compares the amount of credit you are using to the credit available to you. This factor accounts for 30% of your FICO score.

      Basically, your credit utilization is the percentage of debt you carry. If your credit burden is high, it will lead lenders to believe that much of your monthly income is going toward debt repayments.

      “Credit score formulas ‘see’ borrowers who constantly reach or exceed their credit limit as a potential risk,” Kaufman explained.

      Generally, a “good” credit utilization ratio is 30% or less. Improving this aspect of your credit score can require some strategic thinking. If you pay off a credit card, you might want to keep that account open so the open credit line pushes the ratio in your favor. Similarly, asking for credit limit increases can better your burden percentage.

      3. Length of Credit History

      The number of years you have been using credit has an impact on your score. FICO says it makes up 15% of your score, although this can be a bigger factor if your credit history is very short.

      “Newer credit users could have a more difficult time achieving a high score than those who have a credit history,” Kaufman said, “since those with a longer credit history have more data on which to base their payment history.”

      It’s smart to always have some lines of credit open, even if you aren’t using them. This approach is especially true if you, or your children, are young adults, although you want to ensure you can responsibly handle credit cards.

      4. Credit Mix

      Credit mix accounts for 10% of your FICO score, so it is a relatively minor factor unless your credit history is limited. Generally, lenders like to see several different kinds of lines of credit on your report, like credit cards, student loans, auto loans, and mortgages.

      “Credit mix is not a crucial factor in determining your FICO score unless there’s very little other information from which to base a score,” Kaufman stated.

      If you have multiple lines of credit open, you probably don’t have to worry about this factor. Instead, focus on changing your credit utilization ratio or improving your repayment history.

      5. New Credit

      The final 10% of your FICO score is determined by how many lines of credit you have opened recently. This aspect is why people say hard checks on your credit score can actually hurt your standing.

      “Opening several new credit accounts in a short period of time can signify greater risk—especially for borrowers with a short credit history,” said Kaufman.

      When you apply for a new credit card, loan, or lease, lenders look at your credit history. This check itself shows up on your credit report, even if you were denied for the line of credit.

      Inquiries can remain on your credit report for 2 years, but FICO only includes credit checks made in the last 12 months in determining scores. “Soft” checks on your credit, like credit monitoring services, are not included.

      What is a business credit score?

      Your business credit score is a metric assigned by a credit agency as an assessment of your business’s creditworthiness. It’s a factor considered by financiers, banks, landlords and lenders when deciding if, how much, and at what rate to loan your business money, as well as how likely your business is to repay a loan.

      Agencies involvedEquifax, Experian, and TransUnionEquifax, Experian, and Dun & Broadstreet
      Where info comes fromPublic and court records, credit card issuers, lenders, and collection agenciesPublic records, lenders, vendors, and personal credit reports of the owners
      Impact of late paymentsPayments more than 30 days late appear on the reportBoth late and early payments are recorded, regardless of how late or early

      Each agency has a proprietary algorithm and uses slightly different methods of measuring business credit scores, and each has products that use different numerical ranges for business credit scores. However, the scale for business credit scores that’s used the most by financiers has scores ranging from 1 to 100, with scores above 75 considered “excellent.”

      The scale used most frequently for business credit scores ranges from 1 to 100, with scores above 75 considered “excellent.”

      Business credit scores vs. personal credit scores.

      Yes, personal credit scores rate individuals and business credit scores rate businesses—but you should also know a few other key differences between them:

      • Personal credit scores range from 300 to 850, with a score above 700 considered “good” and a score above 800 considered “excellent.”
      • Business credit scores generally fall between 1 and 100, with 75 or higher being excellent.
      • For a 3rd-party to access your personal credit score, they’ll need written or expressed authorization.
      • Business credit scores may be accessed by anyone through the issuing agency.

      How business credit scores are calculated.

      Dun & Bradstreet, Equifax, and Experian all have slightly different ways of calculating business credit scores, and they don’t publicize the exact details of their algorithms. But the general rubric used by all the credit bureaus factors in:

      • Credit lines a business applied for in the past 9 months
      • Credit lines opened by a business in the past 6 months 
      • Credit repayment history over the past 12 months
      • Late payments on a business’s record

      Other data that credit bureaus use to calculate scores include: a business’s revenue; assets; uniform commercial code (UCC) filings, other public records, and liens; and the overall health of the industry in which the business operates. With all this in mind, you can now determine how to improve your credit score if you’re thinking about pursuing financing.

      How to access business credit scores.

      The first step toward maintaining, fixing, or building a good business credit score: finding out your current business credit score. You can purchase yours from the firm that prepared your last credit score—if this is your first credit score, any of the providers will do.

      The exact cost of the report will depend on how much data you want included. Some bureaus also offer services that provide constant credit monitoring for a monthly subscription fee.

      How to improve a business credit score.

      There is no silver bullet for improving business credit scores, but 2 fast ways to do so include paying down existing debt quickly and being mindful of the number of your submitted loans, especially if multiple applications are submitted within a 9-month period. The slower, but far more gratifying, way to raise your credit score is to increase revenue and profits, which you can set goals for and track with a strong bookkeeping software platform.

      Time is also a business’s friend, as scores increase the longer a business is open—as long as it hasn’t taken on more funding than it can repay.

      Bottom line: Is a business credit score essential?

      Not all business financing options use credit scores in their decisions — even submitting Lendio’s application won’t impact your credit. There are also financing options that place a greater emphasis on a business owner’s personal credit score instead. Does that mean you should ignore your small business credit score? No. Since certain types of business loans and financing will review and consider your small business credit score, it’s always a good idea to keep track on how yours is shaping up.

      *Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

      About the author
      Barry Eitel

      Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

      Share Article:

      Business insights right to your inbox

      Subscribe to our weekly newsletter for industry news and business strategies and tips

      Subscribe to the newsletter

      Subscribe to our weekly newsletter for industry news and business strategies and tips.