The 5 Things You Need to Do to Get Your Credit in Shape to Start a Business

The 5 Things You Need to Do to Get Your Credit in Shape to Start a Business

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Is starting a business on your list of goals for 2018? If so, now’s a great time to do a credit check-up. Even if you don’t need financing and plan to bootstrap your business, getting your credit in good shape now will give you one less thing to worry about. And if you will need financing, having strong personal credit will be a must — especially in the early days of your business when it doesn’t yet have a successful track record to show to lenders.

Here are five steps that can get you get your credit in shape to start a business.

1. Check Your Credit

It goes without saying that you need to know what’s in your credit reports, as well as get an idea of your credit scores. You have to know where you’re at before you can determine what steps you need to take.

You can get one free copy of your credit report from each of the three major credit reporting agencies — Equifax, Experian and TransUnion — every year at AnnualCreditReport.com. These reports don’t come with free credit scores, however, so you’ll need to go elsewhere to get your credit scores if you don’t want to pay for them. (Here are 150+ places you can get your credit scores for free.)

Many business owners rely on their personal credit scores when they’re just starting out, but eventually you will want to establish and build a business credit score.

2. Pay Down Credit Card Debt

Personal credit card debt doesn’t have to stop you from starting a business, but if you can pay it down you’ll won’t have to worry about whether you’ll be able to make your payments if your business takes longer to take off than you expected. Plus, lower balances may benefit your credit scores. Debt usage (utilization) is one of the top factors that can impact credit scores. Lower balances can often result in higher scores.

Can you start your business as a side hustle, while you keep your day job? You can use the revenue it produces to pay down debt faster, as well as get a feel for what it will be like to run your business, without as much risk.

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3. Consolidate Remaining Debt

If you can’t pay down your credit cards, consider consolidating with a low-interest balance transfer offer or a low-rate personal loan. It can be easier to qualify for a credit card or loan while you still have an income from your day job. Locking in lower rates may help you pay off debt faster, since a greater portion of your payment will go toward principal rather than interest.

4. Tackle Negative Items

If your credit reports lists unpaid collection accounts, judgements or tax liens — or if you have filed bankruptcy in the past few years — you’re probably not only dealing with a lot of financial stress, but your credit is likely suffering as well. These types of items are seriously negative and can bring down your credit scores significantly. A few things to note as you address these types of items on your credit reports:

  • If you haven’t checked our credit reports recently, you may be in for a pleasant surprise: millions of judgments, tax liens and collection accounts were removed from credit reports in 2017. (You can learn more about the removal of judgments and tax liens here, and more about the removal of collection accounts here.)
  • If you negotiate and settle a collection account for less than the full amount, it won’t automatically mean it will be removed from your reports, but some credit scoring models will ignore collection accounts where the balance is zero.
  • If you resolve a federal tax lien you may be able to get it removed from your credit under the IRS Fresh Start program.
  • Paying off or settling a judgment may not remove it from your credit reports but it can protect you from further collection actions, which in some states may mean having your wages garnished or bank accounts seized. Again, once it is resolved, the balance on your credit reports should be listed as zero.
  • As negative items such as these become older they generally will have less impact on your scores, provided your credit reports list accounts you are currently paying on time.

5. Get a Business Credit Card

The moment you launch your business, consider getting a business credit card. This will allow you to separate business and personal expenses, making it much easier come tax time. In addition, most business credit cards do not report to the owner’s personal credit reports unless they default. This means you may be able to separate your business and personal credit.

Finally, most business credit cards help build business credit. No matter where your personal credit stands, you can get a fresh start with business credit. Building a positive business credit history can contribute to the success of your business. You can check your personal and business credit scores for free on Nav.

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About the Author — Gerri serves as Head of Market Education for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs. She develops educational programs and content for small business owners, and works on advocacy initiatives. A prolific writer, her articles have been featured on popular websites such as Yahoo!, MSN Money, ABCNews.com, CBSNews.com, NBCNews.com, Forbes, The Today Show website and many others.

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