The 3 Best Ways to Stay On Top of Your Personal Credit Score

Mika Bhatia

Mika Bhatia

Staff Writer at Credit Karma
Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over). Follow her at @MikaBhatia!
Mika Bhatia

Latest posts by Mika Bhatia (see all)

Many small business owners use their personal credit to run their businesses, and if you’re a sole proprietor, your business credit and personal credit are closely linked.

It’s extremely important to work on building your personal credit, and not just for your business’s sake. Over the course of your lifetime, you could end up paying $230,000 less in interest if you had an excellent credit score (750+) than if you had a credit score that needs work (300–639).

Owning a small business generally involves wearing a lot of hats and juggling a range of responsibilities. Fortunately, staying on top of your personal credit doesn’t have to weigh you down in the midst of this.

Here are 3 tips that can help.

1. Understand the best practices for building an excellent personal credit score

Like a business credit score, your personal credit score is calculated using several factors. Here are 4 common ones and tips on how to manage them:

  • Credit card utilization: This is how much of your total credit card limits you’re using. You can calculate your utilization rate by dividing your total credit card balances by your total card limits. Experts generally recommend trying to keep this figure under 30%, as the more credit you use, the more likely it may be that you can’t repay your debts. This could result in your credit score being lowered.

One thing to note: while some business credit card issuers report your account activity only to commercial credit bureaus, others also report this activity to consumer credit bureaus. In the latter case, your business credit card use (generally only if you’re the primary cardholder) will also affect your personal credit score.

  • Payment history: As just one or two late payments could negatively impact your credit score, it’s important to pay your bills on time. To help make on-time payments, you can set up automatic payments or sign up for monthly email or text reminders to pay your bill.
  • Derogatory marks: These can include accounts in collections, bankruptcies, foreclosures and liens. Similar to late payments, derogatory marks can really damage your credit score, so try your best to avoid these by staying on top of your debt.
  • Age of credit history: Depending on the credit model, this could be the average age of your open accounts (credit cards, mortgages, auto loans, etc.), the average age of your open and closed accounts, or just the age of your oldest account. Generally, the longer your credit history, the better—so consider carefully before closing accounts.

2. Monitor your credit report regularly

On top of building a strong credit score, it’s also important to keep tabs on your credit report.

Why?

Your credit report is a record of your credit history, including your accounts, credit inquiries, public records and collections.

By keeping tabs on your credit report, you can make sure these items are correct. This is important because your credit score is derived from the items on your report.

If there are errors, these could potentially have a negative impact on your score. A lower score could lead to higher interest rates or make it difficult for you to get the credit you need.

Consider signing up with Credit Karma, where you can view your credit reports from TransUnion and Equifax, two of the three major credit bureaus. You can also see where you stand for each of the credit factors explained above and learn what you should try to improve.

Credit Karma’s free credit monitoring service will also send you alerts when there are changes to your TransUnion credit report, making it easier to stay on top of your credit. You can also dispute errors you spot on your TransUnion report with Credit Karma.

3. Understand when business and personal credit overlaps, and when to keep them separate

Business and personal credit scores are similar in that both are generally calculated by assessing multiple credit factors including on-time payment history, credit utilization rate, and past collections and/or bankruptcies.

If you’re a small-business owner, you may use personal credit to run your business, especially if you’re a sole proprietor. Your personal credit could be assessed when you apply for a business credit card, rent a business space, or take out a small business loan.

So the better your personal credit score, the better position you could be in to receive favorable interest rates or approval for credit products.

In some situations, you might have the option of choosing between using your business or personal credit.

For example, if you’re making a purchase for your business, you may have the option of using your business credit card or your personal credit card.

Generally, business credit limits tend to be higher than personal credit limits, so charging large purchases to your business, rather than personal, credit card could result in a relatively lower utilization rate, which can be better for your credit.

There may also be legal implications to separating your business and personal credit. If you’re running your business as its own legal entity with its own assets and liabilities, then your personal assets might be shielded from the activities of the business (aside from any personal guarantees you might make).

But you should always speak to an attorney to understand what the legal implications are for you and your business.

Separating business and personal credit could also help you manage your tax and business bills more easily.

Experts generally recommend keeping your business and personal credit separate whenever possible.

A Small Business Owner’s Experience

Jennifer Brazer, owner and president of Complete Controller, a virtual accounting service, says her personal credit was essential for her business.

“When you’re a small business owner, [a lot of what you] need to buy on credit or lease—including office space, computers and even office supplies — requires a personal guarantee. That means the vendor is looking at your personal credit score to determine if you’re a good risk,” she says.

Brazer explains that she didn’t pay much attention to her credit before starting her business.

Since recognizing its importance, though, she’s followed a few basics when it comes to her personal credit: keeping an eye on her credit report, applying for credit discerningly, and knowing her score, which she checks about once a month.

She also sets at least one simple goal a month to help her credit, such as paying down debt, increasing a credit limit, or not making any hard inquiries.

Without much effort, she says, she’s now in control of her credit—and her business is all the better for it.

The Bottom Line

As a small business owner, your personal credit is especially important. It can have an impact on not just your personal financial life, but also your business.

By following a few simple steps to stay on top of your personal credit, you’ll better position yourself—and your business—for success.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Mika Bhatia

Mika Bhatia

Staff Writer at Credit Karma
Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over). Follow her at @MikaBhatia!
Mika Bhatia

Latest posts by Mika Bhatia (see all)

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