Interest rates are steadily rising in 2022, making it more important than ever to check and maintain a good credit score so you and your small business can get the financing you need.
Your credit score is one of the most important factors when it comes to getting a loan. You’re no doubt aware that good credit scores will help you qualify for personal credit cards, mortgages or car loans, and sometimes student loans. What may surprise you is how often small business lenders will also look at personal credit scores and/or business credit scores when determining whether your business qualifies for financing.
So how can you tell if your credit score is “good?”
What is Good Credit in 2022?
Good credit means you get approved for the financing you need at attractive rates and terms. But creditworthiness isn’t just a good credit score. Consumer credit approvals (and loan rates) often depend on good credit scores, along with other factors such as income and debt-to-income ratios.
For small business financing, good credit may be based in part on the personal credit of the owner(s) as well as the business credit of the business. Some business lenders check personal credit, some only check business credit, some check both, and a few don’t check credit at all!
What is a Good Credit Score?
There’s no single credit score every lender uses. In fact, there are many different credit scoring models available to lenders. Two main companies create most credit scores lenders use: FICO and VantageScore. But you don’t have a single FICO score or VantageScore credit score.
Neither company has any information about your credit habits, so they have to work with a credit reporting agency (a.k.a. “credit bureaus”) to get information about payment history and other factors. Consumer credit bureaus track personal credit information, and the major credit agencies are Equifax, Experian and TransUnion.
Business credit bureaus track business credit information, and three of the main agencies are Dun & Bradstreet, Equifax and Experian. The Small Business Financial Exchange (SBFE) also collects information that it makes available through those commercial credit agencies and others.
It’s impossible to say definitively what is good credit, since every lender gets to choose what credit scores they will accept. However, most consumer credit scores range from 300 — 850, with the highest score being the best possible credit.
As a general rule of thumb, FICO scores are often categorized as follows:
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Even then, those aren’t set in stone since one lender may find a credit score of 680 perfectly acceptable while another may only lend to those with scores of 700 or higher.
Why A Good Credit Score is Necessary in 2022
A good credit score typically means you’ll get lower interest rates when you borrow, which means you’ll spend less money on interest over time.
For example, the difference between financing a $50,000 loan over five years at 6.75% interest with good credit or 9.25% with OK credit is roughly $8,698 versus $12,639 in interest respectively. It’s easy to see how your good credit can end up save you a lot of money over time.
FICO offers a calculator that helps you understand the interest rate and payment you may qualify for based on your FICO credit score range. It covers mortgages and auto loans. It can be a helpful tool for understanding why good credit is even more important than it has been in past years when interest rates were at rock-bottom.
How to Get a Good Credit Score
Start by getting your credit reports so you can see exactly what is affecting your scores. You can get free credit reports at AnnualCreditReport.com, but that site won’t give you free credit scores.
You’ll also want to check your credit scores and use those to monitor changes in your credit scores over time.
When you get your credit scores, you’re also likely to get information about the top factors impacting your scores. You might see something like “high credit utilization ratio” or “recent late payments.” Take a look at those factors in relation to the information on your credit reports to see where you might make improvements.
There are five key categories in your credit reports where these risk factors may take place. They include:
- Payment History (35% of most scores)
- Credit Utilization (30% of most scores)
- Length of Credit History (15% of most scores)
- Credit Mix (10% of most scores)
- New Credit Inquiries (10% of most scores)
Payment history is the most important factor making up your scores. It includes missed payments along with seriously negative items such as bankruptcies or collection accounts.
In particular, pay attention to credit utilization. This compares your credit limit (available credit) to your balance on revolving credit accounts like credit cards. Higher utilization ratios can bring down your credit scores quickly. Paying down credit card balances can also be one of the fastest ways to improve your credit scores.
Length of credit history (or credit age) refers to how long you’ve had accounts and one tip here is to think carefully before you close out very old accounts. Closed accounts can still help your credit as long as they remain on your credit reports, but over time they may no longer appear on your reports.
Credit mix refers to a mix of different types of credit, such as installment loans and revolving accounts. If you just rely on credit cards, or if you avoid them completely, you may not get as high a credit score as you’d like.
Being careful about how often you open new credit accounts can be helpful. While new accounts aren’t negative in and of themselves, there may be a credit inquiry added to your personal credit that could drop your credit score a few points for a short period of time.
How to Check Your Credit Scores
Just because you’ve always paid your bills on time doesn’t necessarily mean you have good credit. There could be mistakes on your credit reports that are dragging down your scores, or you could unknowingly be the victim of identity theft. The only way to know whether you have a good credit score is to check, and do so regularly.
You can check your business credit scores and personal credit scores on Nav.com. In addition, there are 138+ places where you can get your credit scores for free.
Is It Harder To Get Credit In 2022?
There have been multiple interest rate increases in 2022 and the Fed is expected to raise rates again over the course of the year in an effort to slow down inflation. Higher rates mean higher payments, and that can make it harder to qualify for the loans you need. In addition, some lenders are concerned about a recession and may be tightening their lending standards to reduce risk.
Credit has not dried up— far from it— but overall you should expect it to be more difficult to get certain personal or small business loans in 2022, especially if your qualifications aren’t strong.
Why You May Not Be Getting Approved For Credit
When it comes to getting small business loans, lenders often look at a combination of revenues, credit (business and/or personal credit) and time in business. Scores matter in many cases, but not all, and they are not the only factor small business lenders look at.
New businesses have a harder time getting credit than those that have been in business for two or more years. And every business should have a business bank account to document business income.
Sometimes whether you’ll qualify for a particular loan or line of credit has more to do with the lender or type of loan than it does your credit score.
For example, it is possible to qualify for a business credit card without any revenues because business credit card issuers often allow you to include income from any source, not just the business.
Or you may have bad credit but be able to get financing based on business revenues. Invoice factoring and merchant cash advances are two types of financing that generally don’t require great credit scores.
This article was originally written on December 29, 2017 and updated on August 31, 2022.