When it Comes to Business Finances, Your Personal Credit Matters — A Lot
Gina Bessire of the Zions Bank Business Resource Center helps entrepreneurs understand the link between their personal credit and their business finances.
Content originally published on Aug 22, 2019, and refreshed on Feb 3, 2021
It’s true that good credit offers access to better opportunities, such as housing or employment, but credit can be an asset in and of itself — especially for new or aspiring business owners who don’t yet have a successful track record.
Entrepreneurs may not understand how their personal credit impacts their business, which is why Gina Bessire, manager of the Zions Bank Idaho Business Resource Center, teaches a free workshop called “Credit Matters: Know Your Score and More.” In her experience, it matters — a lot.
“If you’re a startup, you’re very likely not going to have any business credit, so banks will be heavily reliant on your personal score,” Bessire explains. “Your personal score will feed into your business score, but it doesn’t work the other way around.”
Here, she shares some highlights from the class, including information about credit and how it can impact your personal and professional life.
Types of Credit
She starts with the basics. “It sometimes surprises people, but there are different types of credit,” explains Bessire. She says there are three different types of credit:
- Credit type #1: Revolving. Revolving debt, such as credit cards and home equity lines of credit, allow you to borrow at any time up to a set limit. In addition, your balance becomes available again once it’s paid back. It requires a minimum monthly payment and interest accrues if paying it off takes more than one month.
- Credit type #2: Installment. Installment debt, such as mortgages or business loans, allows you to borrow a specific amount for a particular purpose. You have a fixed payment due each month that is paid over a set period with a set amount of interest, and the loan amount is not available again once the debt is paid in full.
- Credit type #3: Open. This describes balances that must be paid in full each month, such as cell phone, utilities, cable and internet accounts. There is no pushing debt to the next month, so there is no interest charged.
Each of us has one, but how much do you know about what goes into a credit score? Typically it’s a combination of a variety of criteria including payment history, amounts owed and length of credit history. In addition, there are several types of credit scores, including:
The FICO score has only been around since 1989, and yet 90 percent of top lenders rely on this scoring model. Scores range from 300 to 850 based on the following criteria:
- 35% payment history
- 30% amounts owed
- 15% length of credit history
- 10% new credit
- 10% types of credit
The VantageScore is an alternative scoring model that was created by Experian, TransUnion and Equifax in 2006. Scores range from 300 to 850 based on the following criteria:
- 40% payment history
- 21% credit age and mix
- 20% utilization or amounts owed
- 11% balances
- 5% recent credit applications
- 3% available credit
FICO SBSS Score
SBSS stands for Small Business Scoring Service, and this score is used for business term loans and lines of credit up to $1 million. Scores range from 0 to 300 and are based on personal and business credit histories, the age of the business, number of employees and finances.
Bessire suggests that when working with a lender, be sure to do your homework to understand which credit score they will use to evaluate your credit worthiness. Equifax, Experian, and TransUnion are offering free weekly online credit reports through April 2021. You will pay a small fee to access your credit score from one of these credit bureaus.
The Cost of Credit
Having poor credit can cost you — literally — since interest rates on loans are influenced by your credit score. Depending on the amount of the loan, the difference in interest paid over the life of the loan can amount to thousands of additional dollars for someone with a low credit score, Bessire says.
For example, according to the FICO Loan Savings Calculator, on a 30-year, fixed-rate $300,000 loan, a borrower with a low FICO score (620-639) could expect to pay $93,657 more in interest over the life of the loan, compared to a borrower with a high FICO score (760-850).
The 5 C’s of Credit
As part of her role at Zions Bank, Bessire is often asked how banks and other financial institutions make lending decisions. She explains that this is based on “The Five C’s of Credit.”
The Five C’s stand for character, capacity, collateral, capital and conditions — and each are critical when it comes to loan decisions.
Common Credit Mistakes
Bessire says that a common credit mistake is closing a long-standing credit card. She recommends cardholders keep established accounts open since the length of credit history is vital to your score.
“A credit card may also be closed by the creditor due to inactivity, so pull that ancient department store card out of the sock drawer and use it for something small every six months and promptly pay it off,” Bessire suggests.
Another mistake involves using too much credit. Bessire says a good rule of thumb is to keep credit utilization no higher than 30% of your limit.
“You want to aim for a balance between no activity and too much utilization,” she explains. “Maxing out your credit cards isn’t wise, but a common misconception is that zero utilization across the board helps your credit, which is untrue.”
That’s because when you don’t use your credit card, the creditor has no information — positive or negative — to report to the credit bureaus.
Want to learn more? Attend the virtual Credit Matters: Know Your Score and More Workshop on March 17. The 1-hour workshop is free but registration is required.
Are you an entrepreneur in need of resources and support? Zions Bank’s Idaho Business Resource Center and Utah Business Resource Center can help you find answers and resources, develop strategies, solve problems and get guidance with business, marketing, sales, financing, management, growth opportunities and more.