Perhaps, like many Americans, you find yourself checking your credit score because you need a business loan. And, as most Americans, you find that you need to boost FICO scores before moving forward.
What are FICO scores for anyway?
Your FICO score is made up of three scores from three credit bureaus (Experian, Transunion, and Equifax) analyzing your credit depth – i.e., how often and how much you’ve successfully flexed your borrowing power – and credit cleanliness – i.e., how few mistakes you’ve made along the way. Your FICO score grows with more successful debt over a long period of time and with little to no missed/late payments.
“Credit scores are lenders’ formula to protect themselves from risk and extend the best offers to the right customers. However, it’s our right as consumers to be proactive about managing your credit health and make your credit score work for you, not financial institutions.” – Justine Rivero, Forbes.com
The hindsight solution is for you to have checked your scores twice a month. Shoulda, woulda, coulda, am I right?
What matters now is that you need financing, but your scores are impeding the process. Don’t give up yet, because there are a few things you can try before running to credit repair.
Most of what you see in your credit history can be resolved with some strategic planning and a few key tasks. Many entrepreneurs boost FICO scores for business funding by targeting balance-to-limit ratios, collections, and limiting the amount of credit inquiries within a 6-month period.
Without further adieu, consider these 3 steps to boost FICO scores for business funding.
1. Improve Your Balance-to-Limit Ratio.
What is a balance-to-limit ratio?
The healthiest FICO scores take years of successful borrowing. But when it comes to revolving debt, most people do not realize how quickly they can improve their balance-to-limit ratio (or utilization rate) by targeting their revolving debt. Doing so can often boost FICO scores just enough for an entrepreneur to qualify for the business funding they need.
Revolving debt is a line of credit most commonly used in the form of credit cards. When credit is revolving, it means that you have an available amount of credit: that is, you can borrow up to a certain amount as needed. It also means that you carry a balance: that is, how much you are currently borrowing.
In terms of the amount of borrowing reporting to your credit, revolving debt is the most influential factor when bureaus calculate your FICO score.
“That means that within the amounts owed category, credit cards are the most important type of account for achieving a high FICO score, but they can also do more damage than other types of credit.” – Jeremy Simon, CreditCards.com
If you have a credit card with a credit limit of $5,000, and you carry a balance of $2,500, then your balance-to-limit ratio is 50%. If across 3 credit cards you have a sum credit limit of $25,000, and you carry a total balance of $20,000, then your balance-to-limit ratio is 80%.
When your balance-to-limit ratio exceeds 50%, your ability to get more funding is greatly impaired (not impossible). Carrying a high balance-to-limit ratio also indicates that you may be a bit stretched in your ability to maintain monthly payments.
“The second biggest contributor to a FICO credit score, accounting for 30 percent, is amounts owed. Within this category is something called your utilization rate, or the percentage of available credit that you use on your credit cards. This rate is calculated for each credit card and for all of them combined. The lower your utilization rate for each card and combined, the better for your credit score.” – Janna Herron from Bankrate
The best place to be is a 30% balance-to-limit ratio, where every revolving credit line/card is also under 50% of the credit limit. If you do not have a 30% balance-to-limit ratio, build a financial plan to get there as soon as possible. It not necessary to pay your balances to $0! 30% is a great target to shoot for and boost your FICO scores for business funding.
Paying Off Loans
Is it good to keep up with payments? Of course.
Is it good to pay off a loan completely? That depends.
Common installment loans such as home mortgages, student loans, or car loans report differently than revolving debt.
Did you know that if you pay off an installment loan you may see a drop in your FICO score? Entrepreneurs that pay off car loans and mortgages can see their credit scores drop as many as 100 points. How is that possible?
When you pay off a loan that is non-revolving, your credit history for that loan is hidden from your credit report, though it may still have a positive affect on your credit. The strongest part of your credit history is its depth: the amount of on-time payments over a sustained period of time.
Many entrepreneurs believe that by making larger or extra payments on installment or traditional loans they will improve their credit, but this is not the case. When you need to put your best foot forward for lenders, the best course of action is to simply maintain the set payment schedule, no more no less.
Remember that revolving credit lines (HELOCs or credit cards) do not close when you pay them off. Maintaining a $0 balance on a revolving line of credit is okay and even a good thing. Closing a revolving line of credit may not be the best course of action. When you close an account, that is one more account of on-time payments that is hidden from your credit (not to mention that you reduce your total available credit which increases your balance-to-limit ratio).
2. Remove Collections by Calling the Collection Agency Directly.
If you have collections reporting to your credit, do not pay them off just yet. You have more leverage with the agency before paying rather than after. Once you are ready to pay off your collections, keep these realities in mind.
“Paid in Full” or “Satisfied” on a Collection is Still a Negative Entry
It is less work for a collections agency to mark your paid collection as “paid” rather than removing it from your credit history. If you call the agency directly, the representative may tell you that they cannot remove it from your credit. But that is simply not true.
It is vital that you receive a verbal commitment or a letter of deletion that once you pay the collection the agency will remove it from your history. Verbal commitments are okay, because all calls at the agency will be recorded. Be sure to record the date and time of your call. Write down the name of the manager you spoke with.
The agency must remove the collection from your history entirely, and they do in fact have the power to do so.
Ask for a Manager
Representatives are less likely to help you as are their managers. You can kindly insist upon speaking with a manager to discuss removing the collection from your credit.
Be Kind and Be Patient
As a general rule when seeking business funding, you to assume that anyone you speak with at a call center is your ally, not your enemy.
Have you ever worked at a call center? It is not very pleasant. Customers are typically very upset. Representatives deal with a lot of angry people, and very few times is the customer’s agitation the fault of the representative. Getting a call from a kind person is like a breath of fresh air for a call center representative.
So be kind and be patient. Do not get upset if they are asking you to repeat bits of information. Do not get upset if they will not let you speak to a manager. If you have difficulty getting anywhere with a representative, kindly get off the call and redial the number. It is unlikely that you will speak to the same person twice, and the next representative may be more helpful.
If the Collection is Incorrect, It Still Might be Better to Pay It Off
Are you on a timeline and need to boost FICO scores for business funding as soon as possible? Then there may not be time to fight or dispute an unfair collection.
In truth, most collections are unfair. You are not alone. It is a shame, but sometimes launching the business is more important than fighting a battle that will cost time and money to win. If you are a first-time business owner, dealing with an unfair collection or two will give you a taste of the difficulties you are likely to encounter as a rookie entrepreneur. Focus on what you are trying to accomplish and shake off the rest.
Pay the Collection AFTER Confirming Removal and Not Before
When following this practice, the agency will remove the collection 80-90% of time. After you make payment, wait 3-10 days for the collection to disappear from your history and boost FICO scores.
3. Pay Attention to Your Hard Inquiries.
When you open an account or attempt approval for a loan, banks put a hard inquiry on your credit. If you amass more than 3 inquiries within a 6-month period, banks/lenders get nervous.
Shopping for car loans put multiple inquiries on your credit, though car loan inquiries in a short period should only count as one. You can get a hard inquiry when signing up for a lease of any kind or even a cell phone provider.
If you had no choice but to put a number of inquiries on your credit, then you ought to wait a minimum of 6 months in order to boost FICO scores for business funding.
On the other hand, there are “soft” inquiries. You can amass all the soft inquiries you want without alarming lenders.
To track your inquiries and credit activity, we at Coda strongly recommend CreditCheckTotal.com. You can view your 3-bureau history, your FICO scores, and more. It costs $1 for 7 days and $29.95/month thereafter. It is the most thorough credit report available for consumers and only puts soft inquiries on your credit.
If All Else Fails, Ask a Reputable Credit Repair Company for Assistance to Boost FICO Scores for Business Funding.
If your score is under 620, you may need credit repair to boost your FICO scores for business funding.
When selecting a credit repair agency, avoid debt consolidation and be suspicious of agencies that charge a monthly fee. Often nonprofit credit repair companies are more trustworthy.
Debt consolidate will damage your credit long-term and is not the same as credit repair. Credit repair agencies that charge monthly may not be motivated to move quickly on your file, and they could drag out the process as long as possible to get as many monthly payments from you as they can. If you are working with a company that charges monthly, maintain diligent follow-up with them to keep them on task.
Once Your Scores Refresh, Move Forward
Credit bureaus may take as long as a month to refresh, but once you boost FICO scores, you can move forward with financing.
If you have more questions related to business funding and FICO scores, contact a business development manager today.