Personal and Business Credit: Do They Affect Each Other?
Everybody knows the significance of having a good credit score. A high credit score gives you access to a lot of financial products from lenders and banks. However, choosing not to build your credit score can spell disaster for your future as you might have a much harder time applying for loans, credit cards, or mortgages.
If you own a business, you might be unaware of the fact that your company has its own credit score too. Just like any individual, a business also needs to prove its creditworthiness in case it needs access to financial services. In this post, we’ll take a brief look at personal and business credit scores, as well as discuss how they influence each other.
Explaining Personal Credit Scores
In a nutshell, your personal credit score dictates how worthy you are in the eyes of financial institutions. This is based on your past lending history as an individual and how financially responsible you are. Credit bureaus like Equifax and Experian assign you a numerical designator depending on how much debt you have, your repayment history, and number of open accounts. When applying for a loan or other financial products, lending agencies will look at your credit scores. Your eligibility and loan terms get better the higher your credit score is, so it’s always a good idea to keep track of your scores.
A guide to credit scores by Petal Card enumerates key factors that can raise or lower your score, such as payment history, credit utilization, credit age, credit mix, and credit inquiries. It’s important to be aware of these factors in order to maintain and build good credit. In the event that you screw up your credit scores, an article by Young Startups notes that it can take years to restore your good name. So, it’s important to always be on your guard and be financially responsible in order to prevent your credit score from dipping.
Business Credit Scores Defined
Not a lot of business owners are aware that their enterprises also have credit scores. Indeed, a recent Manta report notes that 72% of small business owners don’t know their business credit score, and 60% of respondents don’t even know how to access their scores. As with personal credit scores, a business credit score shows the creditworthiness of an enterprise and if it qualifies for a loan and other financial products.
Besides banks and lenders, other companies as well as investors might also want to see a summary of a company’s credit worthiness. For one, a business credit report can help one company gauge how well another company is doing well financially. This is especially important before going into business or entering into an agreement with another company as an enterprise. Additionally, businesses that seek further funding can highlight their credit score to potential investors as a way to highlight a solid financial history.
Do They Affect Each Other?
To cut to the chase, your personal and business credit scores do not directly affect each other. So if your personal credit score suddenly dips if you’ve missed a loan payment or maxed a credit card, your business credit score will still remain intact and high. However, there are a few indirect ways that these two scores influence each other.
For instance, most new business owners use their personal credit scores to secure funding when they start out. Since lenders don’t offer loans to enterprises without credit history, the only way to get loans for your business is by presenting your personal credit score. If you don’t have a high personal credit score, it might be harder to gain funding for your business and establish your venture’s credit score.
Furthermore, some lenders also assess the creditworthiness of a company by checking the credit score of the owner. So despite having a high business credit score, the current state of your personal finances can also affect the financial image of your business. Therefore, it’s important to try to do well and keep both your personal and business credit scores high.
More often than not, practicing financial responsibility is more than enough to keep your scores high. So, try not to fuss too much about the technical factors that affect your credit score, and instead do your best to fulfill your financial responsibilities.