Credit 101

Business credit, like personal credit, is very important for smart business growth. In fact, if you are planning to apply for a business loan or grow your small business, the first thing you need to do is clean up your personal finances. And that means getting your credit report in order.

You immediately start building your personal credit history when you get your first job or credit card. All the information goes into a profile, otherwise known as a credit report. And your credit history compiles every time you have a credit inquiry, change of address or job change. Over time, your credit report becomes a barometer for your ability to pay back debt.

A high credit score qualifies you for the lowest interest rates and the best prices on software, equipment and other large purchases. A low credit score can adversely affect your purchasing power, meaning you pay the highest rates and spend considerably more money on big ticket items than your high-scoring counterpart.

Your FICO score is calculated using information from your credit report on the day it is pulled. It is based on multiple factors such as:

• Payment history - Information about the way you paid your credit accounts in the past, including late payments and bankruptcies.
• Credit accounts - The number of credit accounts that you have and the different types of those credit accounts (e.g. credit cards, auto loans, etc.).
• Credit usage - The amount of credit you are using, and the amount of credit still available.
• Length of credit history - The number of months your credit accounts have been on your credit report.
• Credit applications - The number of times you have applied for credit in the recent past.
• Bankruptcies - The presence and age of bankruptcy records (if any) on your credit report.

With many lenders using credit scoring as a significant part of their loan process, it is extremely important to know the reasons that make your score higher or lower. In fact, knowing the reasons behind your particular score is more important than knowing your score itself. This knowledge enables you to proactively manage your credit so you can get better loans.

The negative and positive factors that go into developing your FICO score are based on actual data from your credit report. By improving your negative areas and continuing your positive actions, you will be able to improve your credit rating.

Factors that are NOT used in calculating your FICO score include age, sex, and race. These factors are excluded from credit scoring to eliminate bias and discrimination from the decision process. Only the information from your credit report is used to calculate your FICO Score.