by Julia Paulus Ogilvie
As a business owner, you should know that the importance of your credit score stretches far beyond your personal financial standing and the opportunities you have. According to Galen Gondolfi, senior loan counselor and chief communications officer of Justine Petersen, business owners often think they can have a split identity and keep their business and personal credit identities separate. “The truth is, you can’t build business credit without good personal credit first,” says Gondolfi.
Today, building and maintaining a high personal credit score can be the difference between earning traditional financing for your business and being turned down. “You can have a business plan, a lease and a logo, but without a high enough credit score, you’ll never get traditional financing,” says Gondolfi. “A good credit score is imperative.”
Ben Lamperti, assistant vice president of commercial lending at Citizens National Bank, agrees that personal credit is a definite consideration in whether to lend to a small business in today’s banking environment. “When we’re dealing with small-business loans, you need a personal guarantee to grant the loan,” he says. “So if a business owner’s personal credit isn’t good, they may not be approved.”
Personal credit scores allow bankers to learn multiple things about the applicant’s tendencies. “First, it shows us whether the business owner is honoring their current debt obligations,” says Lamperti. “They must be making their current debt payments on time. Second, it shows us how much personal debt they have. We need to know that the business provides enough revenue for the business owner to make payments on both the business loan and their personal debt obligations.”
Overall, Gondolfi sees a client’s credit score as a report card for how an individual pays the bills. “It’s a crystal ball for how you will run your business finances,” he says.
But he emphasizes that if you’re earning C’s instead of A’s on your current credit report card, there’s no reason to give up hope. “Don’t be deterred by not having a credit history. You can build credit faster than you can fix blemished credit,” he says. “But you must be forward-looking. You shouldn’t give up. You can have a bump in the road, recover and try again. You can even post bankruptcy and start over.”
Gondolfi suggests taking three key actions to begin building or improving your personal credit score:
1. Have active lines.
2. Maintain balances under 30% on revolving credit.
3. Pay off collections. “If you merely clean up your credit, it will plateau,” says Gondolfi. “And you need to build your credit.”
As a starting point to improve credit, Lamperti agrees that the best way to improve is to continue to pay loans on time and in full.
Credit building doesn’t have to mean a complete change in habits. It can be worked into your monthly budget just like groceries and gas. “You don’t have to change your behavior,” says Gondolfi. “You change your method of consumption. So instead of buying your gas with cash, use a credit card and pay it off at the end of each month.”
Once you have taken these actions, both experts suggest monitoring your progress. “Use online sites that are free where you can periodically check you credit score to see if it’s improving,” says Lamperti.
Gondolfi advises checking your credit every six months while limiting outside entities from polling your credit. “There are a few reliable ways to check your credit,” he says. “Myfico.com is what I would recommend first. There are three credit bureaus. Banks look at the mid score, which is the FICO score. It’s the only one that matters to banks.”
For the many people who feel they are not in the position to rebuild or have lost hope, there are organizations such as Justine Petersen whose role is to assist people in the building of personal credit. “There are people who have lost hope, but it’s only a matter of time,” says Gondolfi. “At Justine Petersen, we have hundreds of examples of people who get home and business loans.”
Although there are organizations like Justine Petersen, Gondolfi says people should be mindful of firms consolidating debt and then collecting a monthly fee for doing so. “Be wary of those services because you can do it yourself or get outside counsel, but don’t pay,” he says.
Overall, once a high credit score is earned, it can become a mechanism for savings. “The average American can save $250,000 in interest with a competitive credit score,” says Gondolfi. “It should be in the 700s. The standard changes, so I usually point out the category and not a specific score. Your car insurance, car payment, mortgage, credit payment and more are all affected by your credit score. You can find hundreds in savings by raising your credit score.”