Small Business Series: What is a credit score?

Lending

Jessie Eby contributed to this blog.

Credit is a tool that allows you to borrow money or access goods and services with the understanding that you’ll pay for them later. It is an important component of personal and business finances, enabling large purchases like homes or vehicles, or allowing small businesses to invest in their growth. Our financial system relies on credit reports and scores (or lack thereof) to determine whether to approve loans and credit applications and to determine the interest rates applied.

There are two types of credit: installment and revolving. Installment credit, such as an auto loan or business loan, is disbursed as a lump sum and has fixed beginning and end dates. Revolving credit is typically what comes to mind when you think about credit cards. It is open-ended and the monthly payment is based on the revolving balance. In other words, the borrower may charge different amounts each month because the amount owed is based on how much debt is outstanding.

What is a credit score?

A credit score is a number that represents your current credit-worthiness. Essentially, it gives lenders an estimation of how likely you are to repay a loan on time based on your credit history. The most commonly used credit scoring system assigns numbers ranging from 300 (poor) to 850 (excellent).

Your credit score is linked directly to you through your Social Security number or your Individual Taxpayer Identification Number (ITIN). If you have no credit report, you will not have a credit score.

Is a business credit score different from a personal credit score?

A business credit score is separate from a personal credit score and is based on the financial health and credit activity of the business. It’s linked to the business through an EIN (although sole proprietors may use their Social Security numbers) and is reported by agencies like Dunn & Bradstreet, Experian Business, and Equifax Business. It’s important to note that if you’re a sole proprietor or small business owner, lenders often consider your personal credit score in addition to your business score.

Why is a personal credit score important for small business owners?

A strong credit score can open doors to new opportunities for small businesses, especially early on. From locking in lower interest rates to building trust with potential investors or partners, your personal credit score matters.

  • Loans: If you’re planning to take out a loan for your business, lenders might look at your personal credit score to determine whether you qualify for business financing. A higher credit score often will lead to a lower interest rate.
  • Insurance: Some insurance providers use credit scores to help determine rates, with higher scores usually resulting in lower premiums.
  • Business relationships: A good credit score can help you negotiate favorable payment terms with suppliers, build trust with potential investors or partners, and ultimately indicates reliability.
  • Managing cash flow: Access to affordable credit can help a business owner manage cash flow and emergencies in slow seasons, avoiding predatory lenders or over-indebtedness.

Ultimately, having good credit allows a business owner to save, improve financial stability, and lead to increased financial security.

Where can I find my credit score?

Free weekly online credit reports are available through annualcreditreport.com. Reports from Equifax, Experian, and TransUnion are also available. Keep in mind, other sites may charge you or fraudulent sites could be set up to steal your personal information. In addition, you can review your credit information through your bank or credit card provider’s online app. You can also use free credit monitoring services like Credit Karma or Credit Sesame. It’s important to know your score will likely vary depending on the scoring model used. However you choose to monitor your credit, be consistent in the source.

What steps can I take to build my credit score?

Building a strong credit score requires a combination of responsible credit use and consistency. Here are the key steps.

Make regular, timely payments

Payment history is the most important factor in a credit score. Making regular payments on time is the best way to see your score grow. If you do not have an open account on your credit report, you could apply for a secured credit card or a credit builder loan to establish a track record of timely payments. The Center for Rural Affairs offers a loan to build credit and our lending services team is available for one-on-one coaching to guide you through the process.

Avoid maxing out your credit accounts

Keep your credit card balances well below your credit limits—ideally below 30%, and for the best scores, below 7%.

Maintain credit history

Keep older revolving accounts, like credit cards, open to preserve your credit history. These accounts should have some activity so the credit issuer doesn’t close them without your knowledge or permission. The longer your accounts remain active, the better it is for your score.

Be strategic with applications

Avoid frequent credit applications to minimize hard inquiries on your report, which can temporarily lower your score. Only apply for credit when it’s necessary and aligns with your financial goals.

Diversify your credit mix

Over time, having a mix of credit types (e.g., installment loans like auto loans or mortgages and revolving accounts like credit cards) can positively impact your score. However, you should only take on new types of credit when necessary and within your budget. If you're starting out or rebuilding credit, tools like credit builder loans, secured credit cards, and rent reporting can help.

What should I do if I have bad credit?

Everyone’s credit journey is different; shaped by a combination of experiences, education, and access to credit products. Credit can be a sensitive topic, and it’s important to acknowledge that while scores are significant, we are all more than just a number. Regardless of your starting point, there are steps you can take to improve your credit and build a healthier financial future.

Address credit report errors

Start by reviewing your credit report for inaccuracies. Errors can negatively affect your credit score and may even indicate identity theft. Disputing and correcting these mistakes is a critical first step in ensuring your credit report accurately reflects your financial history.

Take care of delinquent accounts

If you have delinquent accounts, focus on bringing them up to date. Late payments will remain on your credit report, but getting the account current stops further damage and shows lenders you are working to rebuild trust. Over time, consistent on-time payments will help diminish the negative impact of past delinquencies.

Pay down active debt

Reducing outstanding balances, particularly on revolving accounts like credit cards, can lower your credit utilization ratio—a major factor in your credit score. Keeping accounts active while managing lower balances can improve your score and demonstrate responsible credit use.

Seek credit counseling if needed

If managing debt feels overwhelming, don’t hesitate to seek professional guidance. We provide credit coaching and can help you navigate your unique financial situation. Contact us at [email protected] or connect with a lender here.

Focus on credit building

While addressing existing debts, also work toward building a stronger credit profile. Consider affordable tools like secured credit cards or credit builder loans to establish a positive payment history.

Improving your credit takes time and persistence, but with the right approach, you can achieve your financial goals. Remember, rebuilding credit is a journey, and taking small, consistent steps can lead to big changes. If you need support, our team is here to guide you every step of the way.