In this case, your credit utilization rate would be around 10%.
What’s the ideal credit utilization rate? There’s no single rule, but the lower the better. Some experts recommend keeping your credit utilization rate at or below 30% and others at 10% or less to get the biggest boost.
Improving your credit over time
The two steps above can result in a quick credit score boost, but only if there are no other recent delinquencies or other negative indicators (late or missed payments, collections, charge offs, bankruptcy, etc.) in your credit report. For these types of credit problems, there are additional long-term steps you can take to continue to rebuild and improve your credit.
No secret here. Paying your bills on time every month helps to establish a positive repayment history — one of the number one factors used to determine your score. If you’ve been late or delinquent in the past, get current and stay current. The older those delinquencies get, the less impact they will have on your credit score and the higher your score will climb over time.
- Keep hard inquiries to a minimum
Every time you apply for credit, the creditor will perform a hard credit inquiry. Each hard inquiry will ding your credit score by a few points. The more you apply, the bigger the hit. The caveat here is when you’re shopping for a mortgage, auto or student loan. The FICO scoring model allows you to rate shop and apply with as many lenders as you want, and as long as you apply within a short time frame, it will only count as one inquiry. Depending on the FICO model being used, this rate shopping window can be as short as 14 days and as long as 45 days. To be safe, do all your rate shopping in a 14-day window and you’ll avoid unnecessary dings to your score.
[Quick Tip: If you’re shopping for a small business loan, applying for a loan will typically count as a hard inquiry. With QuickBooks Capital, however, we pull a soft inquiry when you apply so there’s no impact to your personal credit score. This gives you the freedom to rate shop and apply for funding without hurting your credit score.]
If you pulled your credit report and found several accounts that either carry high balances, have missed payments, or are in default, you’ll need to address those issues.
Create a repayment strategy that will help you make regular payments and decrease your overall debt. Your strategy should take into account your current income and bills.
If you have both credit card debt and installment loans (e.g., mortgages, auto loans, etc.), your goal should be to manage on-time payments for each account. After that, any additional cash should go towards paying down credit card debt first. This will help lower your credit utilization and will give you more of a credit score boost than paying down installment loans.
- Build new positive payment history by opening a credit card
Assuming you’ve completed the steps above and your credit is improving, you may want to consider opening a credit card. How can a credit card improve your personal credit score?
Opening a new credit account may help to increase your total available credit. And if you keep a low balance, this can work to lower your credit utilization rate. Plus, by using a credit card and making regular, on-time, monthly payments, you can begin to establish that positive credit history.
A word of caution
If you’re considering opening a credit card to improve your credit, remember that applying for a new credit card will result in a hard credit inquiry, which can temporarily bring down your credit score. Opening a new account will also shorten your average age of credit history, which accounts for 15% of the FICO score calculation.
If you have poor credit, it’s likely you’ll have to contend with higher than normal interest rates, or you may even be declined altogether. In this case, it’s best to start with a secured credit card to work on rebuilding your credit first—at least until you improve your credit enough to qualify for better rates and terms.
Finally, late payments or high balances can do more damage than good, so opening a new credit account should be a step that you take with caution.
Keeping your business and personal finances separate is one of the golden entrepreneurial rules. However, when it comes to business funding, your personal credit can directly impact your ability to secure loans, credit cards, lines of credit, and other business financing products.
By improving your personal credit score, you can unlock more affordable funding options and take advantage of lower rates and more flexible repayment terms.