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What Can Hurt Your Credit Score: A Guide For Business Owners

Nov 02, 2023 • 5 min read
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      As a business owner, you know how important it is to maintain a good credit score. It not only affects your personal finances but also has an impact on your business’s ability to qualify for loans and other forms of financing.

      But what exactly can hurt your credit score? Here are some factors that you should be aware of.

      Payment history

      Your payment history is vital for your credit score. Late payments, missed payments, and defaults can significantly lower your score. To avoid late payments, set up automatic payments or set reminders on your calendar. Manage your debt levels to prevent late payments. Consistent on-time payments can enhance your credit score and increase your chances of securing a business loan.

      High credit utilization

      Credit utilization refers to the amount of credit you are currently using compared to your total available credit. If you consistently use a large percentage of your available credit, it can hurt your credit score. This is because it may indicate that you are relying too heavily on credit and may have trouble paying back any additional loans.

      A good credit utilization ratio can vary, but a general rule of thumb is to keep it under 30%. This means that if, for example, you have a total credit limit of $10,000 across all your credit cards, you should aim to use no more than $3,000 at any given time. Keeping your utilization low shows lenders that you’re a responsible borrower capable of managing your credit wisely, instead of maxing out your credit cards. Remember, just because you have a high credit limit, it doesn’t mean you have to use it all. It’s all about balance. By maintaining a lower credit utilization ratio, you’re setting your business up for a healthier financial future and keeping your credit score in good standing.

      Closing old accounts

      While it may seem counterintuitive, closing old accounts can actually hurt your credit score. Closing old accounts can impact your credit score in several ways.

      First, let’s talk about your credit history. It’s the record of how long you’ve been borrowing, and older accounts can make your credit history look more established. When you close an old account, you’re essentially shortening that history, which can ding your credit score.

      Another thing to consider is your credit utilization ratio. This ratio is calculated by dividing your total credit card balances by your total credit card limits. Closing an old account—especially one with a high limit and a low balance—could increase your credit utilization ratio, making it look like you’re using more of your available credit than you actually are. This can negatively impact your credit score, since it may appear that you’re overly reliant on credit.

      Soft vs. hard credit inquiries

      Understanding the difference between soft and hard credit inquiries can be crucial to maintaining a healthy credit score. So, let’s break it down in a simple, jargon-free way.

      A soft inquiry, (aka a soft pull) typically happens when you check your own credit score, or when a company checks your credit for preapproval purposes. It’s a kind of peek into your credit history that doesn’t affect your credit score, so you can have as many soft pulls as you like without any worry.

      On the other hand, a hard inquiry (aka a hard pull) occurs when a lender checks your credit after you’ve applied for a loan or credit card. It’s a deeper dive into your credit history, and it can impact your credit score. Usually, a single hard inquiry can knock a few points off your score. But don’t panic! This small dip is often temporary, and your score should recover over time, especially if you continue making timely payments and keep your credit utilization low.

      It’s also important to note that several hard inquiries in a short time might signal to lenders that you’re a higher-risk borrower. This could happen if you’re applying for multiple credit cards at once or shopping around for a loan without pre-approval. To keep your credit score on track, it’s wise to spread out your credit applications and seek preapprovals when possible, which only require a soft pull.

      Remember, understanding the ins and outs of credit inquiries can help you make informed decisions that protect your credit health while you’re securing the financing you need for your business.

      Errors on your credit report

      It’s always important to regularly check your credit report for any errors or inaccuracies. Even small mistakes can have a big impact on your credit score. If you do find any errors, be sure to dispute them with the credit reporting agency to have them corrected.

      Not having a diverse credit mix

      Having a diverse mix of credit can actually help improve your credit score. This means having a combination of different types of loans, such as a mortgage, car loan, or credit cards. If you only have one type of credit, it can make it difficult for lenders to assess your risk and may lower your score.

      Closing thoughts

      Maintaining a good credit score is crucial for business owners who are looking to secure financing. By understanding the factors that can hurt your credit score, you can take steps to avoid them and improve your overall credit health. Keep in mind, consistent on-time payments, responsible credit utilization, and a diverse credit mix can all contribute to a healthy credit score. And if you do hit a rough patch and your credit score takes a dip, don’t worry. With good financial habits and careful decision making, you can bounce back and continue building toward your business goals.

      About the author
      Lendio Editorial Team

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