Improve Your Credit Score To Save Money
 By Stephen A. Lanvil

Your personal credit score has always affected your small-business borrowing. Banks and other credit issuers take a close look at your personal credit history when deciding whether to lend money to your business.

But in these times of tightening credit, your personal credit score matters more than ever.

What’s The Score?
Each of the three national credit bureaus – Equifax, Experian and TransUnion – has its own credit scoring method. But they’re all based on one model, known as FICO.

Credit scores range from the low end of 300 to the high end of 850. They’re calculated based on a number of factors. The most important is your payment history, including late payments and bankruptcies. The score also takes into account how recently problems have occurred, so a payment problem several years ago should carry less weight than a recent one. Another factor is your current debt situation, including how much debt and how many credit cards you have. The credit bureaus also consider the length of your credit history and whether you have long-term loans and/or short-term installment debt.

Why Scores Matter
Companies use your score when deciding whether to extend credit to you or give you a loan. Bank, credit card issuers, landlords, auto insurance companies and even suppliers can check your credit score. Usually, the better your score, the less interest you’ll pay for accessing credit.

A higher score can save you money. For instance, the monthly payment on a $25,000, 36-month auto loan might be about $763 for someone with a high credit score in the 720 to 850 range. They would be charged a low interest rate since they’re considered a good credit risk. Conversely, a borrower with a low score between 500 and 589 could end up paying around $868 because of a higher interest rate.

Raise Your Score
Most people who score in the mid-700 range or higher will likely qualify for the loans they want without having to pay a premium for credit.

If your score falls below that level, take action.

First, pay your bills on time. Second, lower your outstanding debt by paying off credit cards. The New Jersey Society of Certified Public Accountants advises that you use no more than 25 percent to 30 percent of your available credit. That shows the credit bureaus that you’re able to manage some debt, but that you’re not overspending with the cards you have.

Next, check your credit report to make sure it’s accurate. You’re eligible to receive a free credit report annually from each of the three major credit rating bureaus. To learn more, go to http://www.annualcreditreport.com.

Correct any errors you find on your report including:

• Incorrect addresses or telephone numbers
• Credit card accounts you have closed, but that still show open
• Errors in payments

AFS Can Help
Need help understanding or improving your credit. The small-business consultants at AFS ProTalk can help.

AFS Members have unlimited access to ProTalk at no additional cost. Get confidential answers to credit questions such as:

• How does my personal credit impact my small-business credit?
• How do banks use my credit score if I apply for a business loan?
• How can I improve my credit score?
• How will my credit score affect my interest rate on a bank loan?
• How do I correct errors I find on my credit report?

(Posted November 2008)

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