How Credit Scores Affect Small-Business Loans

Don’t know your FICO score? Learn it, then live it: Business.org navigates the numbers and lets you in on how to raise your ranking for a bigger loan.

You’re not a number, you’re a person . . . except when it comes to credit scores. Then yes, you’re a number. But at least that number isn’t determined by a single institution through largely clandestine practices, right? Sit down; we have news.

When processing small-business loan applications, most banks and lenders like to see a personal credit score of 620 or higher. For a majority of the time, that score is determined by FICO, a data analytics company founded in the 1950s as Fair, Isaac and Company (hence the acronym). There are some lenders that will overlook a sub-600s score and take a chance on small businesses with no or bad credit, but a good FICO score is a nearly universal deciding factor. The higher that score, the more money you’ll usually be able to borrow for your business.

Credit score tiers

Credit score tier
FICO credit score

Excellent credit

750+

Good credit

700–749

Fair credit

650–699

Poor credit

600–649

Bad credit

Below 600

What is a credit score?

A credit score is different from a credit report, but credit reports are used to determine credit scores.

FICO utilizes a proprietary algorithm to draw credit report information from the world’s three primary credit bureaus: Equifax, TransUnion, and Experian. Access to this algorithm is purchased by lenders. Since the scores from each are usually different, the midpoint total between high and low, referred to as the “middle score,” is used as the representative number.

While FICO is the most widely consulted credit score (90% of all lenders use it), there are other companies that have cultivated their own versions—though the methods and results are similar, they’re not the same thing. When checking your FICO credit score online, make sure it’s an actual FICO score and not one from a competitor. You’ll want to see what your potential lenders are seeing. Think Googling versus Binging or Yahooing.

How can you improve your credit score?

The algorithmic inner workings of FICO are hush-hush, but the general breakdown of a credit score is no secret. The five pieces of the FICO pie are these:

  1. Payment history. Your payment history on revolving loans (like credit cards) and installment loans (like student loans and mortgages) makes up 35% of your FICO credit score total, the largest segment. Since future payment behavior is predicated on past payment—or lack of payment—behavior, the simplest way to improve your credit score within this component is to make your installments on time and consistently.
  2. Credit usage. The amount of money you’ve previously borrowed, and currently owe, on available credit makes up 30% of your FICO score. Low credit balances of around 6% score more favorably, with $3,000 or less owed on revolving accounts. To improve here, don’t carry large balances, and don’t push your credit limits or max them out.
  3. Credit history length. Coming in at 15% is the overall duration of each of your credit accounts—and the span of time between recent actions on those accounts. A pristine credit score comes easily to someone who’s new to the process, but a deeper credit history provides more insight and predictors of future financial performance. Those with long-running accounts should maintain them to raise their FICO standing, and newbies should start using their credit ASAP.
  4. New credit. It constitutes only 10% of your FICO score, but applying for new lines of credit is still something to approach judiciously. For those just starting out, opening several new credit lines within a small time frame may be viewed as “suspicious” activity, but it’s a more temporary blemish than late account payments or outright delinquency. For people with more established credit, on the other hand, applying for a larger new line of credit on an account that’s nearly drained can bolster their score: a balance of $7,000 on an $8,000 credit line isn’t a great optic; up your credit line to $16,000 and that balance looks much smaller and, thus, better.
  5. Credit mix. The final 10% of a FICO score is about how well you’ve managed a diverse mix of installment loan and revolving credit accounts, showing that you can responsibly maintain a variety of debt. A varied portfolio can include installment types like mortgage, auto, student, and furniture loans and revolving types such as bank, retail, and gas station credit cards. It can also include unpaid loans taken over by collection agencies or debt buyers and rental data. Though keep in mind that a single portfolio doesn’t need all of these simultaneously.
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Credit score terms and practices to know

FAKOs

Upstart, non-FICO credit scoring systems have been tagged with the nickname “FAKOs” (pronounced “fake-o”). While they use similar methodology and arrive at numbers not dramatically different from FICO scores, they’ve achieved only a fraction of FICO’s market saturation. FAKOs include VantageScore (jointly developed by Equifax, TransUnion, and Experian), PLUS (developed by Experian), and TransRisk (developed by TransUnion). Know when you’re looking at a FICO or a FAKO score.

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Check your real personal credit score with FICO: the one used by over 90% of lenders!

Debt-to-income ratio

Carrying too much debt can lower your credit score. Your debt-to-income ratio is calculated by adding up all of your monthly debts and dividing them by your gross monthly income (before taxes). Most lenders set their limit at a 36% debt-to-income (DTI) ratio.

Multiple credit cards

There’s many a story about entrepreneurs who’ve launched businesses by spreading the cost across multiple credit cards—but they tend to leave out one detail: a credit score of 680 or above. Without that, it’s difficult to get one card, let alone several, with low interest rates and high balances. On the upside, credit cards provide access to cash quickly and offer the aforementioned low interest rates, payment flexibility, and an unsecured line of credit (meaning you won’t have to put up collateral, like your house).

Hard vs. soft credit inquiries

You’ve seen the commercials for apps that let you check your credit score for free with no negative effect on your number. That’s probably true, but a little misleading. First, sometimes those apps are sending you to a FAKO (always check the source). Second, checking your own credit score, known as a soft inquiry, has always had zero impact on your digits. Only official bank checks upon application for a loan or credit card, known as hard inquiries, affect your credit score (usually knocking off five points or less, then disappearing after two years).

Non-debt bills

Failure to pay non-debt bills, such as utilities and rent, doesn’t count against your credit score. So even without lights, water, or even an apartment, you could still theoretically boast a 680—though it may be difficult if you also neglected to pay your internet or cell phone bills. Important note: collection accounts and unpaid medical bills do not fall under the non-debt umbrella.

In the cold, analytical eyes of FICO, you may be a number, but it still takes people to build businesses—and credit scores. Creating and maintaining a good credit history is essential to hitting the FICO sweet spot, which can mean the difference between getting your business off the ground or never moving past the planning stages. There are few outside influences that will affect your business future more. So learn your FICO score, then work toward raising it.

Bill Frost
Written by
Bill Frost
Bill Frost has been a writer, editor, journalist, and occasional graphic designer since the grunge-tastic ’90s. His pulse-pounding prose has been featured in Salt Lake City Weekly, Coachella Valley Independent, Wausau City Pages, Des Moines CityView, Tucson Weekly, Las Vegas Weekly, Inlander, OC Weekly, and elsewhere; he’s currently a senior columnist at SLUGMag.com. When not cranking out quips, Bill actualizes beer money as a musician and podcaster. You can reach him at bill@business.org.
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