How To Repair Your Credit

Keeping score

For entrepreneurs and small-business owners, credit scores can delay more launches and stop more expansions than any other step in the startup process. The numbers serve as the ultimate barometer of default risk. And these days, lenders aren't the only people taking a closer look.

"Everybody is using it—insurers, landlords, utility companies—which I don't think is fair, but that's the reality of the market," says Bennett Blackledge, branch sales, operations and business development manager for Gulf Coast Bank & Trust. "It's critical to the success or failure of small businesses."

The good news, he says, is that the countless current and aspiring business owners who have watched their credit scores plummet during the economic downturn can stop the bleeding and begin rebuilding. The process is slow but not impossible: It's not going to happen overnight, and it likely won't require revisiting your business plan.

The three credit bureaus—Equifax, Experian and Trans Union—closely protect the formulas used to calculate credit scores. Bankers don't even know how the all-important numbers, which range from 300 to 850, are assigned; the average Fair Issac Co. score in the U.S. last year was 723. There are rough percentages of the formula split, however, providing guideposts as to how to rebuild your score.

Payment history weighs heaviest—about 35% of the total score—so the first step is to assess all outstanding debts and aggressively pay off the smallest first, Blackledge says. Though a person or a company might be tempted to pay down the largest debt if it's accumulating the most interest, in most cases the credit score is going to be influenced by how many outstanding debts you have and not by total debt. Though it might make one feel better to pay off a mortgage, car note or student loan, eliminating credit card debt will do more for his or her score.

Balances count, too. Maintaining low balances on multiple lines of credit is better than having a high balance on one. Keeping balances low in relation to credit limits also is important; a person doesn't want to appear to be using all of the credit he or she can get. Most bankers suggest utilizing no more than 30% of available credit; keeping it around 10% is best.

Late payments can send credit scores plummeting, especially past-due medical and utility bills. It takes two years for every late payment to clear off a credit score. So, Blackledge says, the next step is to address any payment issues you have. If a person is already behind on a payment or is in jeopardy of falling behind, he or she should be proactive to prevent further credit score damage.

How To Repair Your Credit Easily | SHM News

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