What Entrepreneurs With Bad Credit Need to Know Before Applying to Get a Loan

What Entrepreneurs With Bad Credit Need to Know Before Applying to Get a Loan

Your credit score affects your ability to borrow money from a bank or financial institution. This includes most types of lending ranging from small-scale personal loans and mortgages, to larger loans intended for business.

Having a good credit score essentially gives a lender insight into your willingness to actually pay back a loan if they were to give it to you. Checking your credit score in advance is actually pretty easy, and contrary to popular belief, checking your score will not hurt your credit in any way. Let’s go a little deeper and dissect the anatomy of a credit score and figure out what to do if your score is in the lower spectrum.

How Do I Check My Credit Score?

Your credit score is a roadmap of sorts. The starting point being adulthood and the final destination being your overall credit score. However, it is what is in between that is important. That is where you either kept up your monthly payments to debtors or you didn’t. The latter being the main reason why your credit score is lower than desired. Debts include anything from mortgage and car payments, to bankruptcy, taxes, and other legal judgments.

It is remarkably easy (and usually free) to get your credit score. Be leery of any company that wants to charge you for access to your credit score as it is likely a scam. The three big credit reporting institutions are TransUnion, Equifax, and Experian. They’re the firms that do all the digging, compiling all of the information reported by banks, lenders, and financial institutions into one solid number. That number is your credit score.

What about FICO?

FICO, which is short for Fair, Isaac and Company, is another type of credit score, is another type of credit weighing algorithm that is similar, but not the same as the credit reporting from TransUnion, Equifax, and Experian.  

The numbers generated by FICO can actually be up to 100 points off due to differences in algorithmic computations. Late and default payments can impact your FICO score heavily, and since a huge percentage of top lenders take your FICO score into consideration when awarding loans, it would be in your best interest to keep your debts in good standing. There are options for bad credit loans so even the poorest credit score can still qualify for a loan, but the interest rates are usually much higher than a standard loan. 

How to Fix Poor Credit Score?

For those of you who have a poor credit rating, there are several things that you can do to fix your score.

1. One of the first steps is also one of the most essential, and that is to check your credit score. The best way to do this is by using one of the big three credit bureaus mentioned earlier in this article. There are also a number of different online tools that can do this too.

2. Check for any mistakes and typos in your report. Even the slightest mistake—such as a wrong address—can affect your credit score. Make sure you check, and double-check all the details, ensuring everything is correct in your credit report. If any errors are found, make sure to report them as soon as possible.

3. Any disputes can usually be reported online. Some disputes will take longer than usual, so stay patient.

4. You can also increase your credit card limits. Do that by paying all your balances and then ask your bank to increase your credit limit. It will positively affect your credit ratio, without a doubt.

In other words, you have to keep your credit utilization low. For instance, if you have $2000 credit limit, and you used $1000 of that, it means you have a 50% utilization limit. If you pay part of this credit and use less credit in the future, it will have a positive effect on your credit score.

5. Pay your bills on time, because even one late payment can influence your credit score. If you are late for even one of your mortgage or credit card payments, the lender will oftentimes report this to credit bureaus. You can always check and see exactly which accounts appear in your credit report.

6. You can increase your credit card utilization ratio by opening another account or credit card. As long as you don’t carry a balance on that card, your available credit increases by that card’s limit immediately. Look for cards that don’t have annual fees, however, this type of credit could offer bigger interest rates.

7. You can also pay a credit repair company that will remove negative information from your report and, eventually, improve your credit score. However, the Consumer Data Industry Association prohibits firms that report credit data from removing negative information in exchange for payment, because they want to maintain the accuracy and integrity of credit reports.

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