A credit score is a 3-digit number which ranges from 300-900. It describes your past credit history (including the credits you took and if you paid for the same on time or if you defaulted on a loan anytime, etc.)
It is one of the important criteria to be granted a business loan. A good credit score increases the chances of loan approval, whereas a bad one decreases the chances of loan approval. A good credit score also helps in getting the loan at affordable interest rates.
Therefore, as a business owner, you should work on improving your credit score for the better.
The credit score is generally provided by a credit bureau. But a few lenders also have their own automated credit evaluation system.
So what basically is a good credit score?
As mentioned above, the range of the CIBIL score is between 300-900, where 300 determines the lowest creditworthiness of the applicant, and 900 determines the highest creditworthiness.
Generally, a credit score of 750 and above is considered good, a credit score which is less than 700 is a risk for the lenders.
The best loans can be availed with a credit score of 800, therefore a credit score of 750 is what the lenders generally check while granting a business loan.
The interest rate which is charged by the lender is related to the credit score. Loans availed at best interest rates also help in maintaining proper cash flow and also help in managing expenses in a better manner. With a good credit score, the lender can negotiate on the interest rate terms which is kept by the lender and can get a loan at flexible terms and conditions.
Here are some of the listed benefits of having a good credit score:
- It can help in quick loan approval.
- With a good credit score, one can get low-interest loans and a higher approval limit.
- It also helps in getting easier approvals for loans related to the property (rented or leased).
- With a good credit score, the business owner can get many good credit card offers and deals.
Before we look at how you can improve your credit score, let us have a look at some factors that can affect the credit score.
Factors affecting credit score:
1. Repayment history of the applicant
Repayment history is the most important factor which affects the credit score. If anyone of the koans were not paid, it affects the credit score negatively.
Lenders always check if you are capable of repaying the loan on time by considering factors like payment of bills on time, debts, bankruptcies, or a court case that has been against you, and the frequency at which you missed your payments.
2. Debts which are not cleared
It is necessary to keep a track of all the debts, earning capacity, and your actual earnings, so that you are aware of the debts you have cleared and the ones that are remaining.
If you currently have to pay for some debts and you increase your debts, it will affect the credit score.
3. Many loan applications at the same time
When the lender or lending institution inquires to check your credit history and comes to know that there are many loans that are taken simultaneously, or if there are many inquiries, in the same manner, it will affect the credit score, as it can indicate that you have taken more than you can pay for.
4. Credit limit
The time period of using the credit also plays an important role.
High credit usage has a negative impact on the credit report because it can mean an increase in the number of debts.
Credit utilization is calculated by dividing the outstanding amount with the credit limit. If credit utilization reduces over a period of time, it will boost your credit score.
5. Many unsecured loans
Many unsecured credits like a personal loan or the credit card expenditure can also affect the credit score. The lenders consider this as mismanagement of finances. If you go for secured loans, it can help your credit score to go up.
6. New credits are taken
If the number of accounts you have opened recently are higher than the total number of credits during the cash flow problem in the business, it will affect your credit score in a negative manner.
7. Term of the loan
If you repay for the loans on time, it will positively affect your credit score, but if you pay earlier or later than the due date, it can also affect the credit score.
Before taking the step of paying earlier or later, read the terms and conditions of the lender carefully.
8. Not reviewing the credit report from time-to-time
It is necessary to keep checking and updating the credit report from time-to-time ( at least after every 6 months) so that you get the chance to correct the errors (if any).
If there is any mistake in the report, it will be reflected the lender which will again reduce your credit score.
If you want to improve your credit score, here is how you can do that:
1. Set payment reminders
Outstanding debts can have an effect on your credit score. That is why it is important that you set a proper reminder to pay EMIs on time. Because delays can make you pay a penalty which will lower your credit score.
2. Maintain older credit cards
Maintain the old credit cards if you can pay your bills on time. This will help build a strong credit history and in turn help in maintaining a good credit score.
3. Get a flexible credit limit of possible
If you are able to restrict the credit usage as per the time allotted, it is better for your credit score. Reaching the limit can lower your credit score. Therefore, always discuss this with your lender and make a customized credit limit based on your expenses.
4. Opt for a longer loan tenure
Try choosing a longer loan tenor for repayment as it will make sure that your EMI is low, and you also make the payments on time. When you do not default, your credit score will improve.
5. Do not take too much debt at a single point in time
Keep the number of loans you take time to minimal so that you can repay for each comfortably. Because you keep taking loans when there are no sufficient funds, it will affect your credit score.
Successful repayment can improve your credit score on the other hand.
6. Choose different forms of credit
Borrow a mix of credits like secured and unsecured for long and short loan tenor respectively to help build a strong credit score.
If you want a business loan but are worried that your credit score is not up to the mark, visit Gromor Finance, get your credit score evaluated, fill a simple application, and get the loan you require!