If you’re applying for a business loan, lenders can check both your personal and business credit scores:
- Bad personal credit is usually defined as having either a FICO credit score below 580 or a VantageScore of 600 or less.
- Bad business credit is often defined as having a PAYDEX score below 50, a FICO SBSS under 140, or an Experian Intelliscore Plus of 25 or less.
If you have what is considered bad credit, there are ways you can fix it. It’s important to improve bad credit because it can not only make it more difficult to get approved for personal and business loans, but it can also result in lenders charging you higher interest rates and fees. This is because having bad credit tells lenders that lending money to you is more risky as you are more likely to default on a loan.
We provide information on what constitutes excellent, good, or bad credit and how both personal and business credit scores are calculated. We also go over what you can do to boost your credit scores.
Common Credit Scoring Models
Many types of credit scoring models exist, each considering different factors in calculating a credit score. Lenders often choose the one they believe most accurately represents the risk of lending out money.
Personal credit scoring models
FICO and VantageScore are two of the most popular types of personal credit scores often used by lenders for personal and business loan purposes. For instance, Fair Isaac Corporation states that over 90% of the top lenders use a FICO score in reaching loan decisions. Meanwhile, VantageScore is used by more than 3,000 different financial institutions.
Credit scores are calculated using the information in your credit report. Lenders can obtain credit reports from each of the three major credit bureaus: Equifax, TransUnion, and Experian. Due to differences in how each reports and compiles data, you may see slight variations in your credit scores among the three bureaus.
Business credit scoring models
Experian’s Intelliscore Plus, Dun & Bradstreet PAYDEX, and FICO SBSS are three common types of business credit scores used by lenders.
How Personal Credit Scores Are Calculated
FICO and VantageScore consider many of the same aspects of your credit report in calculating your credit score. However, each places a different weight on certain areas of your credit. Below is a summary of how your credit score is calculated for each scoring model and how much each category contributes to your score.
FICO | VantageScore (version 4.0) | |
|---|---|---|
Payment History | 35% | 41% |
Amounts Owed | 30% | 6% |
Length of Credit History | 15% | 20% |
Credit Mix | 10% | |
New Credit | 10% | 11% |
Available Credit | – | 2% |
Utilization | – | 20% |
100% | 100% |
Payment History
For both FICO and VantageScore, the most heavily weighted part of your credit score is your payment history. The idea here is that if you’ve consistently made timely payments in the past, then you’re likely to continue doing so moving forward. Late payments hurt your score less as they age. Similarly, minor late payments hurt less compared to more serious delinquencies.
Amounts Owed
For FICO credit scores, the amount of credit you use is measured to determine your overall risk level. Using a high percentage of your credit is seen as risky, and a sign that you could be overextended. We recommend having balances that total no more than 30% of your overall available credit, although 10% or less is a more ideal figure to maximize your credit score.
For this section of your credit score, VantageScore only looks at how much you owe on your credit accounts. Utilization is considered elsewhere in its calculations.
Length of Credit History
Having a longer track record of managing credit will reflect positively on your credit risk. This section typically looks at the age of your oldest account and the average age of all of your accounts combined.
Credit Mix
Having experience with different types of credit shows lenders you’re more well-rounded and can manage the nuances involved with different credit accounts and payment terms. Examples of different types of credit can include revolving credit cards, charge cards, installment loans, and mortgage loans.
New Credit
Borrowers with a lot of applications for credit or recently opened accounts represent a greater risk of defaulting or becoming overextended. Applications for new credit are reflected as hard inquiries on your credit report—and the more hard inquiries you have and the more recent they are, the more negatively your credit will be impacted.
VantageScore considers all credit inquiries within a 14-day time frame as a single inquiry for purposes of calculating your score. This allows borrowers to shop rates with multiple lenders without too large of a negative impact to scores. FICO operates similarly, although the exact time frames can vary depending on the type of loan you’re shopping rates for.
Available Credit & Utilization
A small portion of VantageScore considers how much available credit you have. The more the better. VantageScore also looks at how much credit you’re utilizing on your credit accounts, such as credit cards and installment loans.
How Business Credit Scores Are Calculated
Business credit scores use many of the same factors as personal credit scores, with some even considering a company’s finances. However, the weight given to each category can vary depending on the credit scoring model being used:
- Experian Intelliscore Plus: The main factors that contribute to this credit score are your payment history and credit utilization. Experian does not disclose the exact formula, but the score does take into items such as the number, type, amount, and frequency of delinquent payments.
- Dun & Bradstreet PAYDEX: Your PAYDEX score is determined by how your vendors and suppliers report your payment history. It’s a dollar-weighted measurement, meaning larger payment amounts have a greater impact on your score. The timing of your payments also affect your score here. Scores greater than 80 indicate you make your payments prior to the due date, while scores of 79 or lower typically payments being made past the due date.
- FICO SBSS: Like most other business credit scoring models, FICO does not disclose the exact formula for how its score is determined. However, critical factors that comprise the SBSS score include data from your personal credit report, business credit report, and financials. Lenders can place different weight on these factors, so it’s possible to have a slightly different score if you apply elsewhere.
How Bad Credit Affects You
Regardless of the scoring model that lenders use, bad credit can have a significant effect on your financial well-being. Creditors review your credit profile to determine creditworthiness, and low credit scores indicate you may be unable to handle new debt responsibly.
Bad credit can affect you in many areas, including:
- Major purchases: Mortgage lenders review your credit scores before approving or denying property purchases, equipment loans, or vehicle loans. Commercial lenders will factor in your credit as part of their decision-making process on business loans. Learn more about the loan approval process in our guide on how to get a small business loan.
- Leases and rentals: Many landlords and leasing companies consider your credit scores along with past payment history. Bad credit can indicate to these entities that you’re too risky for a lease agreement.
- Interest rates: Interest rates on credit cards and loans are based primarily on credit scores. The lower the credit score, the higher the perceived risk, and the more interest you’ll pay.
Tips on How to Improve Your Credit Score
You can follow the following tips to improve each area of your credit score:
- Set up automatic payments or payment reminders: Continuing to make payments in a timely manner is the best way to build a good credit score. Setting up automatic payments or reminders can reduce the likelihood that you’ll miss a payment due date.
- Pay down credit card debt: Paying down credit card debt can lower your credit utilization ratio, which is a large contributing factor to your credit score. An added benefit is that you can also save on interest charges.
- Make payments before statements cut: Many credit cards and loans report your statement balance to the credit bureaus. By paying off or paying down the balance prior to the end of your billing cycle, a smaller utilization ratio can be reported to the credit bureaus, which in turn can help your credit score.
- Don’t apply for unnecessary credit cards or loans: Limiting the number of times you apply for a loan or credit card is something that can keep your credit score higher. Before you submit a new loan application, consider what you expect to get from the funds, and if it’s something you need.
- Check your credit reports for errors: Mistakes happen, and lenders may sometimes report erroneous information to the credit bureaus. This can include incorrect information about your account, payment history, and more. Checking your credit report regularly can also help you identify other potential issues, such as unrecognized accounts due to identity theft.
- Ask creditors for goodwill in removing late payments: It’s possible to get late payments removed from your credit report by simply asking your lender. The chances of this happening are typically greater if it was an isolated incident, you’ve had a long history of making timely payments, or you have an otherwise strong relationship with the bank.
How To Check Your Credit Score
There are several places you can visit to check your credit score:
- Each of the credit bureaus or companies: The companies behind each of the credit scores can provide you with access to your personal and business credit reports and scores. Some offer these at no charge, while others may require you to pay a small fee. If you obtain your credit reports and are having trouble understanding them, you can check out our guide on how to interpret a business credit report.
- Banks or credit card companies: If you have any products or services with banks, credit card companies, or other financial institutions, you may already be provided with the ability to see your credit scores.
- Third-party companies: Some third-party companies, such as Credit Karma and Nav, offer the ability to either purchase or view credit scores and credit reports.
Frequently Asked Questions (FAQs)
The credit score you see may vary from what lenders obtain. This can be due to a number of reasons, such as a difference in credit scoring model year, varying information among the credit bureaus, or a variation in the type of credit scoring model being used. Some scoring models, for instance, weigh certain types of credit accounts more heavily than others.
Yes. Despite the fact that FICO and VantageScore are typically used for personal consumers, they are also often used for business loans. This is because many business loans require a personal guarantee, so lenders still consider personal credit scores to be relevant when determining the creditworthiness of a business applicant.
It typically takes several weeks to several months to fix bad credit. The length of time varies depending on why your credit score is low. Simple errors, for instance, can be fixed in a matter of weeks. Repairing the damage from a late payment, however, is something that may take at least several months.
Improving your credit is a process that takes time, and if you’re unable to wait, we recommend checking out our picks for the best bad credit business loans. For example, National Funding, a provider on the list, reviews applications on a case-by-case basis and can provide custom loan options to suit your business circumstances.
Bottom Line
Bad credit can make it difficult for you to get approved for personal and business loans. It can also result in lenders charging you higher interest rates and fees. Fixing a bad credit score can save you money in the long run and allow you and your business easier access to credit. However, improving your credit score takes time, so it’s best to get started as soon as possible. If you’re just getting started, we recommend reading our guide on how to build business credit.
