Business and personal credit share many similarities. Having good credit — for businesses and individuals — often means better access to loans.
However, for business owners, understanding the differences in personal vs. business credit, as well as how they relate to one another, can be crucial in keeping both your business and personal finances afloat.
You may already be relatively familiar with personal credit and your personal credit score. Three credit bureaus, Equifax, Experian, and TransUnion, monitor personal credit.
You can monitor your personal credit by keeping tabs on your credit report and your credit score.
- Credit report: Your credit report is not a judgment of your credit. Instead, your credit report is essentially your financial resume. It will include your personal information, as well as credit card payments, loan payments, credit inquiries, collections records, bankruptcy filings, and tax liens. Other details, such as credit limits and the age of the account, will also be included. This information is reported to the bureaus, but it is your responsibility to ensure its accuracy. Erroneous information on your credit report could be docking your credit score unnecessarily.
- Credit score: Your credit score, on the other hand, is the rating of your credit habits. Your score is meant to measure your creditworthiness — in other words, how risky it is for lenders to lend to you. A number of different scoring models exist, but the most common is the FICO. Credit scores are measured from 300-850.
Having a good personal credit score can open many doors for you. Not only does it make lenders and creditors more willing to lend to you, but it can also help you qualify for more favorable interest rates. As a result, you’ll save money over time.
A number of factors contribute to your credit score:
- Payment history: Your payment history makes up the largest proportion of your credit score at 35 percent. Missing payments, therefore, can have a significantly negative impact on your score.
- Credit utilization: Credit utilization accounts for 30 percent of your score. Credit utilization is the amount you owe vs. the amount of credit available to you. Therefore, maxing out your cards will drop your score. In fact, a general rule of thumb is to keep your credit utilization below 30 percent.
- Length of credit history: The length of your credit history determines another 15 percent of your score. This measures the average age of all of your accounts. Therefore, closing an account, particularly an old one, can shorten your credit history and therefore negatively impact your score.
- Types of credit: Also known as your “credit mix,” types of credit account for 10 percent of your score. This means having different kinds of credit, such as credit cards, student loans, car loans, etc. can be beneficial.
- New accounts: New accounts determine the last 10 percent of your credit score. Every time you apply for a new account, your credit report will show a hard inquiry. Applying for or opening too many new accounts at once can signal to a lender that you’re desperate for credit.
Business owners should have an understanding of the differences between business and personal credit. Reflecting only on the financial health of the business, business credit shares many similarities with personal credit. For example, payment history, credit utilization, and types of credit also impact business credit scores.
However, there are also some key differences in personal vs. business credit:
- Information on business credit reports: Unlike personal credit reports, business credit reports include background information about the business including owners, parent companies, subsidiaries, etc., as well as the business’s financial information, such as bank accounts, assets, real estate holdings, sales, inventory, etc.
- Credit bureaus: Business credit reports are available through the business credit bureaus: Equifax, Experian, and Dun & Bradstreet. The bureaus also charge to access your business credit report.
- Scoring models: Business credit scoring models generally range from zero to 100. Scoring models also differ between bureaus and vary by industry.
- Privacy: All information for your business is public record, including bankruptcies and tax liens.
New businesses frequently don’t have much of an established credit history. However, building business credit can help you have greater access to loans and other forms of financing for your business.
Building business credit involves some crucial steps:
- Get your business set up for credit: Register your business with an employer identification number, which is what will be associated with the credit report. You will also need a business bank account and a dedicated address and phone number for your business.
- Get established in the DUNS: One of the business credit bureaus, Dun & Bradstreet, uses the DUNS – Data Universal Number System – to differentiate businesses in their system. This will allow you to access information such as your Paydex score, which gives your business a score on a scale from 1-100 to help determine how likely a creditor would be to lend to you.
- Establish credit accounts with the bureaus: Additionally, to build credit, establish trade lines that will be reported to the credit bureaus if possible. Business lines of credit and credit cards can also help establish credit, but make sure you can make on-time payments and keep your utilization low.
The Relationship Between Business and Personal Credit
When you’re first starting a business, your business won’t have an established credit history. You may be tempted, therefore, to use your own personal credit for business financing. However, tying your personal and business credit can be dangerous for you and your business.
As your business grows, the risk of having your personal credit tied to it will also grow. Additionally, basing business funding on your personal credit can make it more difficult for lenders to get a clear picture of your business’s financial health. Your personal credit score will also take a hit every time you use it to apply for more business credit.
Keeping your business and personal credit as separate as possible is generally in your best interest. However, sometimes you may not have that option. With a new business, many lenders may request your personal credit anyway. Because your business hasn’t established its credit history, lenders will use your credit to get an idea of how you may handle your business’s finances. Additionally, if you are a sole proprietor, creditors will likely check your credit when you apply for funding. On the flip side, your business credit won’t typically impact your creditworthiness as an individual.
The Bottom Line
When it comes to personal vs. business credit, knowing the ins and outs will be crucial to your success as an individual and a business owner. Having good credit is beneficial in both cases. Good credit will allow you more access to more financing options and to the best interest available. Knowing what will improve your personal and business credit can keep you making progress towards your financial goals.
If you’re struggling with personal or business credit, the team of experienced debt professionals at Tayne Law Group, P.C. is here for you.
Call us for a free consultation at 866-890-7337 or fill out our short contact form and we’ll get in touch!