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When you’re navigating the small business loans process—or any kind of lending process, for that matter—you’re bound to bump up against your credit score again and again (and again). That number is a crucial indicator of the types of loans you can qualify for, and at what cost. And, as you can imagine, getting a perfect credit score means having the most and best small business loans at your fingertips.
So: How does one actually get a perfect credit score? And is getting a perfect credit score even possible?
The quick answers are: By being smart with your debt, and yes (as long as you’re smart with that debt—as you might expect)! To be a little less vague about it, to get a perfect credit score you need to pay back what you owe, only take on the debt you can manage, and generally be aware of where your credit score stands.
In truth, it’s hard to control the exact outcome of your credit score. You actually have a bunch of different credit scores (more on that later), and all of those credit scores are dynamic, regularly fluctuating based on information your creditors report. That said, there are certain practices you can follow to get both your personal credit score and your business credit score (more on that later, too), as close to perfect as possible. We’ll show you how.
Several iterations of the credit score exist—your business credit score, your VantageScore, your industry-specific credit score (if applicable), and more. And which of those scores a lender considers during the underwriting process will vary according to the lender itself. But when we’re talking about getting a perfect credit score, we’re referring to your personal credit score.
It’s often hard to make blanket statements about small business lending—every borrower, lender, and loan process are their own beasts entirely—but we can say this: The vast majority of lenders look at your personal credit score when considering whether to extend you a loan, and how much that loan will cost you. Generally, the higher your personal credit score, the more loan options you’ll have available to you, and at lower interest rates.
Why do lenders care so much about your personal credit score? Essentially, it’s a numerical indication of your historical reliability as a borrower. That history incorporates the way you’ve handled your debt across all kinds of credit accounts, including your personal loans, car loans, mortgages, student loans, credit cards, and business loans.
And every time a lender considers offering a loan, they’re effectively considering taking a risk: They’re calculating that a borrower is financially solvent and responsible enough to repay what they owe, according to the loan’s terms. When considered alongside other information on a business loan application, that credit score gives lenders a pretty good idea of whether a business, and its owner, are able to handle additional debt. At least on paper.
It may seem unfair, or at least short-sighted, for a lender to judge your ability to handle your business’s finances based on your personal credit activity. But, generally, lenders tend to assume that a small business owner’s personal financial habits will more or less match up with their business habits—and that does make sense. If you make late payments on your personal credit card, there’s a good chance that you’ll make late payments on your business credit card or other small business loan payments, too.
On the other hand, getting a perfect credit score—or as close to perfect as possible—demonstrates to lenders that you’re more than able to manage debt, both personally and professionally.
Now that we’ve gushed about your personal credit score, we do need to cover another important score: your business credit score.
Like your personal credit score, your business credit score is a measure of financial reliability. In this instance, of course, the credit bureaus aggregate information on your business’s credit activity, rather than your personal credit activity. Dun & Bradstreet, Experian, and Equifax are the three major business credit score agencies, but the first is the biggest.
Your D&B PAYDEX credit score will lie somewhere between 0 and 100. That score is determined based on the information on your business credit report, which includes data reported by vendors, banks, business credit card issuers, and other public data under your business’s name.
The majority of that score is determined based on the timeliness of your payments, but some other factors might include:
Again, your personal credit score is crucial to the underwriting process, and not every lender will even pull your business credit score. But a strong business credit score reinforces your business’s legitimacy, which, in turn, may increase your chances of securing the biggest loans at the lowest interest rates. Also, establishing business credit further separates your personal and business finances, which is one of the best practices for every small business owner to follow.
Like your personal credit score, the best way to reach a perfect business credit score is to repay all your bills in full and on time—that includes payments to vendors, utility companies, small business lenders, and any other suppliers your business works with—and keep spending on your business credit cards in check.
There are three main credit bureaus that monitor your personal credit: TransUnion, Equifax, and Experian. Again, there are lots of credit scores out there, and methods of calculating those scores, but FICO is by far the most common (followed closely by VantageScore). It’s named for the Fair Isaac Corporation, the data analytics company who invented this system in the 1960s.
Every so often, FICO releases a new version of its algorithm, which weighs consumer information differently. All three credit bureaus may use a different version of the algorithm, but FICO 8 seems to be the most widely-used version. (We say seems, because the bureaus can’t share too much about this proprietary information.)
On top of that, the credit bureaus vary their algorithms based on the lender pulling your score—because, realistically, a small business lender needs different information on a borrower than a car lender does. As a result, your credit score will fluctuate slightly across the bureaus, and it may also look a little different based on the type of loan you’re applying for.
Regardless of which algorithm a credit bureau uses, and for which lending purpose, your credit score will always range from 300 to 850. Score breakdowns vary a bit, too, but this list is a good rule of thumb:
Again, each version of the FICO algorithm weighs consumer credit activity differently, which means your credit score may change often. And the bureaus will never make the details of their models public knowledge. So, it’s tough to nail down exactly how your score is calculated.
But we can say for sure that the credit bureaus aggregate a range of credit activity, across all your credit accounts, to come up with that score. And the bureaus do consider some of those activities more important than others.
More specifically, the bureaus distill the activities and behaviors in the following five categories, listed from the most- to least-heavily weighted, to come up with your score:
Ultimately, the way you deal with your credit in each of these categories points toward one trait: financial responsibility (or lack thereof). When lenders are looking for “financial responsibility,” what they generally want to see is that you don’t overburden your income with debt, avoid bankruptcies and other legal mishaps, can reliably handle several types of credit, and generally show that you’ll pay them back what you owe.
But to attain the coveted, perfect credit score, of course, you’ll need to ace every one of these categories. We’ll show you how to do that.
While some factors impacting your credit score are beyond your control, there are still more that you can control. Adopt the following best practices in each category, make them habitual, and your credit score is bound to rise.
Your payment history is the most important factor feeding into your credit score, because it addresses some critical questions: Do you pay your loan bills in full and on time? Have you ever missed payments, defaulted on a loan, or declared bankruptcy? The answers to those questions provide creditors with the clearest indication of how well, or not, a consumer honors their debt agreements.
To get a perfect credit score, start by following these three crucial payment history rules:
We’re probably going to sound like a broken record here, but this bears repeating: The simplest way to reach and maintain a perfect credit score is to pay all your bills in full and on time. That includes loan bills, credit card bills, and even rent and utility bills.
The numerical effect of late payments depends upon how late the payment is, how recently that late payment occurred, and your existing credit score. As you can probably guess, high-scorers who make recent, super-late payments (we’re talking 30, 60, or 90 days, before the dreaded charge-off) will see the greatest hit to their scores. That hit could be as much as 90 or 110 points, and it’ll stay on your report for seven years.
Set up automatic deposits with your lenders or credit card issuers so you don’t risk forgetting to make your payments. If automatic deposits isn’t doable for you, be extra diligent with your repayments: Plan out your calendar, check it often, and keep a cash cushion in both your personal and business bank accounts in case your reserves run too low to satisfy your debt one month.
If you’re forced to abandon a debt obligation and default on your loan, your credit score might not be top of mind. However, you should be aware that a substantially lower credit score will hurt your chances of getting another loan or credit card in the future, and defaults will dog your report for seven years.
Of course, you might not have any other option than to default. But if you can borrow from a friend or family, or tap into another, separate source of funds, it might be worth considering. A perfect credit score isn’t easy to attain if you’re climbing back from a loan default.
The credit bureaus cull publicly available information to generate your credit score, so legal issues like bankruptcy, judgments, collections, and foreclosures (but not tax liens, as of April 2018) are all fair game.
Of course, no one tries to run into such severe financial distress that they, or an outside agency, is forced to take legal action. And if that does happen, they’re likely not thinking about their FICO score. Still, you should be aware that any such negative public data will severely impact your credit score, and it’ll be hard to reach a perfect score with any one of them on your credit report.
Depending on your credit score, filing for bankruptcy can lower your credit score by more than 100 points—and the higher your score, the greater the impact. And negative credit information will stay on your credit report for seven years, unless it’s a Chapter 13 bankruptcy, which will stick around for a decade.
As you can probably guess, the “amounts owed” category refers to the total amount of outstanding debt you’re carrying. But at its most fundamental level, you can consider this category a measure of your frugality. In particular, your credit utilization ratio—also known as your credit-limit-to-debt-ratio—shows how much credit you use compared to how much credit is available to you (aka your credit limit). That includes store credit cards, too.
Acing this credit category is pretty straightforward: To get a perfect credit score, you’ll simply need to monitor your spending on your credit cards.
The general rule is that you should keep your credit utilization ratio below 30%. But that’s not so much a “rule” as it is a rule of thumb: It just means that you should keep your spending as low as possible, especially if you’re angling toward a perfect credit score. Keep in mind that the bureaus consider your individual credit limits and your combined credit limits when measuring your credit utilization ratio.
But that doesn’t mean you should aim for 0% utilization, since stagnant credit can actually hurt your score. If you’ve got old credit cards, dust them off every once in a while to keep that utilization going. That’ll help you out in the next category, too.
The age of credit history category measures the average age of your accounts, as well as how long it’s been since you’ve used your accounts.
Typically, consumers with longer credit histories are rewarded with higher scores. From the lender’s perspective, longer credit histories point toward more experience with debt and, therefore, more responsibility in managing that debt. Also, lenders want to see that you’re actually using all your cards—missing data puts lenders on edge. (More on that in a sec.)
So, take a beat before cancelling your oldest card, even if you rarely use it. Not only will closing that account decrease your credit history’s average age, but it’ll also increase your credit utilization. Think of it this way: If you’re closing an old, unused credit card, you’re decreasing the total amount of credit available to you, but maintaining your spending habits. Better to use that old card occasionally, and pay off its full balance on time each month, rather than closing it entirely.
And if you don’t have a credit history at all, lenders simply don’t have enough information to discern whether you’re an able borrower or not—and since they’re chronically risk-averse, they won’t necessary be inclined to give new borrowers the benefit of the doubt. Seems obvious, but to get a perfect credit score, you need to have a credit history in the first place!
If you’ve signed up for a new credit card or loan within the past year, you might see a small, temporary ding in your score. As we mentioned earlier, creditors view newer accounts as riskier than older ones, because there’s less activity available on which to judge whether a borrower is responsible or not.
And applying for lots of loans within a short period of time can temporarily hurt your score, too, since most lenders will make a hard credit pull during the underwriting process to check up on your credit report. Hard inquiries affect your credit score by just about five points, but, of course, that number multiplies with every application. Plus, applying for many loans at once can signify to lenders that you’re in a financial bind, which doesn’t bode well for your ability to repay all that debt.
All told, don’t apply for lots of loans in quick succession if you’re after a perfect score. And if you do apply for a loan or credit card, make sure it’s the loan or card you really need, and that you’re absolutely certain you can repay your debt—say it with us!—in full and on time.
“Credit mix” refers to the two types of credit: revolving and installment. “Revolving” loans, like credit cards and business lines of credit, are pools of credit or cash that you can pull down from in any amount and at anytime you want, and you’ll only pay for what you use. “Installment” loans, like term loans or student loans, are a lump sum of cash that you repay in regular amounts, on a regular basis.
Creditors want to see that you can manage both types.
Pursuing a healthy credit mix doesn’t mean taking on unnecessary debt—a diverse mix of credit will only boost your score if you can responsibly handle all that debt. You don’t want to take on so much debt that your budget can’t handle any additional loans (or, in other words, incentivize prospective lenders to turn down your application). But it does mean that you shouldn’t be afraid to take on a small business loan, an additional credit card, or a business credit card if you can truly afford the cost of that debt.
To get a perfect credit score—and make sure it stays that way—you’ll have to regularly monitor your credit reports to catch and correct any inaccuracies that may pop up. Unfortunately, those inaccuracies occur more than you’d think: Data shows that more than one in five consumers have an error in their credit report that impacts their credit scores.
You’re legally entitled to receive one, free credit report each year from all three of the major credit bureaus. It makes the most sense to request one report every four months, so you can track your score three times over the course of the year. But feel free to check your score even more than that. When you request your own credit report, the bureau makes a soft pull, which doesn’t affect your score.
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What all of the above information boils down to is this: Pay all your bills in full and on time, regularly spend within your means, only take on the loans you need and can manage, and make a habit of checking your (free!) credit report a few times a year.
Following those basic guidelines will help you build up to, and maintain, a good credit score. But when you’re aiming to maintain a perfect credit score, you can’t slip up.
In reality, though, there’s no need to drive yourself crazy in pursuit of a perfect credit score. Even with a score in the low 800s, or even high 700s, you still have a great shot at qualifying for coveted financing products, like bank loans and SBA loans, at the lowest interest rates.
Ultimately, there’s no spell you can perform that’ll magically produce an 850: To get a perfect credit score, you just need to make smart financial decisions throughout your life as a credit-holder. (But if you do know how to perform credit magic, let us know.)