The Role of Your Credit Report and Score In Business and Personal Life

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Monitor Your Credit Report

Even though you are a business, your personal credit reports and scores have a role to play in your business success. Managing your credit reports and scores is crucial to keeping your costs reasonable for your business.

Why Your Credit Report and Score is Critical

If you are a sole proprietorship, as many entrepreneurs start out, any loans you need or credit relationships with vendors you apply for will involve an analysis of your credit-worthiness. You are an unknown quantity to them, and so they look to your credit reports and score for information.

What Lenders and Vendors Look At

Your credit report has a lot to say about your personal habits in managing money. Creditors — banks and vendors — are looking to see if you are going to be reliable in your cash management. They want to see if you will repay on time — and consistently. If you are planning on a personal equity line of credit, equity loan, or refinance on your home to finance operations or growth, or even purchasing real estate for your business operations, good personal credit is crucial.

They are specifically looking at:

  • Whether or not you have over-extended yourself. Do you have too much credit available? Are you possibly planning to run balances up to keep your business afloat with an influx of quick cash?
  • Are your credit card and loan balances close to your maximum credit allowed? Having high balances on your cards, or large loans, can indicate that you are relying on credit for cash flow (both personally and for business), which makes lenders and vendors nervous about being yet another creditor hoping for payback.
  • Do you pay on time? Do you have a string of 30, 60, or 90 day late records on your credit accounts? Being able to pay on time according to credit terms is a big deal to your creditors. It shows whether or not you are not good at managing your cash flow and maintaining a proper budget. They don’t want to extend credit and be left holding the bag on your debts.
  • Do you have a bankruptcy or collection agencies on your credit reports? These are both very bad signs for a potential creditor to see. They are usually indicators that you don’t know how to manage your money. And if you can’t manage your personal finances, why should they think you can handle business finances (which are usually much larger sums)?
  • And lastly, are your creditors closing accounts on you? Proactive creditors, fearing that one of the above issues might prevent them from getting their money out of you, may close your account to further charging, which is a big indicator to other creditors that even your current creditors don’t trust you to pay back your debts. It may seem like a small thing, but it’s bad news on your credit report. Better for you to close the account first.

All of the above things are critical to being approved for loans, bank lines of credit, and vendor lines of credit, especially for sole proprietorship companies. But I’m sure you’re wondering about how your personal credit reports and scores can affect you if your business is a partnership or corporation.

It affects you far more than you might think. Any business without a strong and lengthy track record may require personal guarantees from owners and/or officers to obtain credit. This is especially true if you are applying for a larger line of credit. If it is outside of your company’s usual level of financing, creditors will want to see proof that they’ll get their money back somehow. Even if it is out of your personal hide. They may or may not require a formal agreement where your personal funds back up the line of credit, but they’ll certainly want to know that you have the resources and ability to step in to help the business if necessary.

So What’s the Bottom Line?

You need to keep a close eye on your credit reports and scores. Something as simple as a mistake by a creditor, or as complex as identity theft, can really mess up your personal credit. You need to regularly check your reports with the three major credit bureaus and fix anything that is wrong. And if you are a business owner with assets to protect, you need to take extra care to avoid identity theft.

And it’s not just about your business. You need to protect your family in this time of financial upheaval. If your business pays your family’s bills, then keeping your credit clean is all about protecting your family as well. Don’t let somebody else’s mistakes or a malicious thief ruin your ability to provide for yourself and your family.

How to Monitor Your Credit Reports

There are basically two ways to go about this — paid and free.

You can obtain one copy of your credit report each year from the three bureaus at AnnualCreditReport.com. However, you have to pay for the credit scores separately. Also, as a business, you don’t really want to wait a year between reports. If something goes wrong, you need to catch it before then. Quarterly monitoring is probably the minimum you should consider.

Your second option, and I highly recommend this as a necessary business expense, is to either obtain your credit reports once a quarter by paying each credit bureau for them, or (and even more useful) to have your credit monitored on a regular basis by a credit monitoring agency.

Benefits of Credit Monitoring

The expense is usually quite minimal, but it includes several benefits:

  1. You can get copies of your credit reports when you need them. If you are concerned about a possible sudden change in your credit, you can check when you need to without the additional cost of doing it at the credit bureau.
  2. You get constant identity theft and credit monitoring. If something negative comes across the board, such as somebody applying for credit in your name, changing contact information in your reports, or other sudden changes, you’ll be notified immediately so you can take action.
  3. You can watch for potential reporting errors much easier. Creditors do sometimes make mistakes in reporting your payment history, or over-limit charges, or other mistakes. You can watch carefully, at no extra cost, to make sure these are corrected before your credit score suffers.

My husband and I started using a credit monitoring service a couple of years ago. For about $10 per month for each of our social security numbers, we have some serious peace of mind.

I highly recommend that you keep a close watch on your credit these days. Identity theft is up, credit reporting mistakes are up (sometimes creditors report other people’s problems on your reports), and you never know when some stupid collections agency will post a bad mark on your record for not responding to them when they’ve actually been interacting with someone else about their debts.

If nothing else, it’s good for your peace of mind to know what the credit bureaus are reporting. If you can’t afford monthly monitoring over time, at least take advantage of a monitoring agency’s services for a short while, just to ensure that all is well with your credit. I’ve personally done the free route before, and with all of the individual sign-ups, paying each bureau for scores, etc., letting the monitoring folks do it for you is so much easier. As a business person, I’m sure you understand — like I do — how much your time is really worth.

What do you think about credit reports and credit monitoring? Any good stories to share with either route?