Your credit score will be vital to recovering after the coronavirus crisis passes. So how do you protect it while the pandemic is still going on? Here, we discuss why and how to protect your credit score in detail.
But first, you need to take note of the importance of protecting not only your personal credit score but also your business credit score since both can impact your business’s survival.
Let’s briefly discuss the difference between business credit score and personal credit score before we move on to how the COVID-19 pandemic has affected them, what you need to know, and what you can do to improve your score right now.
What is your personal credit score?
Your personal credit score is a number ranging from 300 to 850 which lenders use to determine how likely you are to make repayments on time for a loan or a credit card (known as creditworthiness). It’s connected to your social security number and is based on your personal spending history.
A stronger personal credit score will usually mean that lending institutions will see you as a more reliable borrower, possibly resulting in higher loan approval odds, larger loan sums, better interest rates, more flexible repayment options, and so on.
But, the opposite is also true. If you have a weak personal credit score, you will likely find it difficult to get approved for a loan or a credit card. If you do manage to get approved for a loan with a weak credit score, you can expect to see higher interest rates, more demanding repayment terms, and so on.
Note: While different from your business credit score, it’s crucial to have a strong personal credit score for the well being of your business. Since so many small business owners have their personal and business finances so closely intertwined, personal credit scores are often considered when applying for business loans or credit cards.
Who determines your personal credit score?
There are three main credit reporting agencies that determine a personal credit score: TransUnion, Equifax, and Experian. Personal credit scores start being calculated once you begin taking loans or using credit cards.
Your personal credit score is determined based on your payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%).
What is your business credit score?
Your business credit score is a number ranging from 1 to 100 which represents your business’s ability to cover its financial obligations.
Depending on how strong or how weak your business credit score is, your business may be able to take a loan with more or less favorable terms. Higher business credit scores often mean lower interest rates and more flexibility with repayment schedules. Lower business credit scores usually mean the opposite, and can even stop a business from qualifying for a loan altogether.
A strong business credit score can also have a positive effect on your relationship with suppliers. A business with a strong credit score will appear as a more secure client for a supplier and can result in better payment terms and even discounted rates.
Who determines your business credit score?
Two of the same credit reporting bureaus that generate personal credit scores also generate business credit scores: Equifax and Experian. The third business credit reporting agency is Dun & Bradstreet. Once your business is officially registered with an Employer Identification Number (EIN), you can register your business with one of those three credit bureaus to start tracking your business credit score.
The factors that calculate your business credit score are similar to those that are used to calculate your personal credit score. There are some other factors that are considered, including the size of your business, the risk of your industry, and so on.More than 10% of American workers filed for unemployment benefits in just the two-and-a-half weeks between March 15 and April 4, 2020. What does it mean for credit scores? Click To Tweet
How could COVID-19 affect your credit score?
The coronavirus pandemic has forced thousands of small businesses to shut their doors and caused millions of workers to claim unemployment. In fact, more than 10% of American workers filed for unemployment benefits in just the two-and-a-half weeks between March 15 and April 4, 2020 (holy cow!).
The situation is unprecedented, but what does it mean for credit scores?
Well, since countless Americans have seen a dramatic slowdown or even a complete stop of cash flow, many have been unable to make payments on debts. That could mean delinquencies on loan, mortgage, or credit card payments.
Note: Not all industries have been impacted by the coronavirus crisis the same. Read this industry breakdown of the coronavirus impact on the small business economy for a detailed explanation.
In plain language, that’s not a good situation for anyone’s personal or business credit score. That’s why finding creative ways to increase business cash flow during the coronavirus outbreak is a key component in avoiding permanent closure.
Being that there’s such a high potential for incurring harm to your credit score because of the current crisis, it’s important to see what the government is doing to offer financial protection for you and your business.
Does the CARES Act offer credit protection?
The CARES Act does offer credit protection to individuals and small businesses, but only if they meet specific requirements. Let’s break it down to the basics.
First off, federal law now gives every American free weekly access to their credit reports through the major credit bureaus. You can check your credit reports for free by visiting AnnualCreditReport.com. Be sure to visit the correct website – it looks like this:
* Image source: www.AnnualCreditReport.com
Typically, if you miss a payment on a loan, mortgage, or credit card, your creditor can designate you as delinquent and report that status to the three credit bureaus. That would result in your credit score dropping. Technically, creditors can still do that even if you missed the payment due to the coronavirus crisis.
But (here’s where it gets interesting) you can contact your lender or creditor and request accommodation on your payments (reduced payments, deferment, etc.). If your lender or creditor agrees to grant accommodation, and you were current on your payments prior to being impacted by the pandemic, then they are obligated to report your account as current to the credit bureaus. That applies to any accommodations made starting from January 31, 2020 until 120 days after the national emergency status is removed.
Note: If your account was delinquent prior to the arrangement of the accommodation, your lender or creditor may continue reporting you as delinquent until you catch up on payments.
Sometimes a good defense isn’t going to be enough to win the battle though. In order to ensure your business survival during the COVID shutdowns, you’ll need to take active measures to actually improve your credit score as well.
5 steps to improve your credit score during COVID-19
1. Check your credit score regularly
Credit reporting bureaus are not perfect, they often make mistakes. That’s why you should be checking your credit reports for errors or inaccuracies on a regular basis. It will also help you avoid fraudulent activity and counteract it before your credit score is hurt. Normally, you’re allowed one free credit report per year from each credit bureau. In response to the coronavirus pandemic, Equifax, Experian, and TransUnion are offering free credit reports once a week through April 2021. Take advantage of this change while it lasts!
2. If possible, make payments on time
We’re aware that this is the main pain point when it comes to protecting credit scores during this crisis, but hear us out. If there’s any way that you can rearrange your finances so that you can at least make the minimum repayment requirements for your debts, do it.
It’s better to make the minimum payment on all debts than to miss even one.
If you do miss a payment, certain bureaus will allow you to add a consumer statement to your credit reports explaining that the current situation has interfered with your ability to meet your financial obligations.
3. Be careful with your credit utilization rate
A recent Facebook survey found that 47% of open businesses are reluctant to borrow money out of uncertainty over if or how they’ll be able to pay it back. In the current circumstances, it’s a good idea to be cautious with your finances – even with credit that you already have access to.
It may be tempting to make use of all of the credit you have available at your disposal as a short-term business survival strategy, but that may turn out to bite you back further along down the road. Eventually, you’ll have to make good on the credit you use.
While on the one hand, it may be a viable step to keep your business open, there will still be costs that come along with using credit. If you have any doubts about your ability to make repayments later, be very careful about borrowing money now.
Note: This is also a good reason to keep your personal and business finances separate. Business expenses are usually more costly than personal expenses – so when you consistently pay for business expenses with a personal credit card, your credit utilization rate will be consistently high. That will damage your personal credit and do nothing to help you build your business credit.
4. Use trade credit
Using trade credit is one way for your business to continue building a strong credit score even while lenders are reluctant to provide loans during this crisis. Not all suppliers report their clients’ payment history to business credit bureaus, so be sure to check if yours do. If they don’t, consider changing suppliers – which will also give you an opportunity to negotiate better terms and maybe even get more trade credit from your suppliers.
Having your supplier report your good credit history with them will help you build up a stronger credit profile. Be sure to contact your suppliers to investigate this option.
5. Reach out to your lenders for help
This is a difficult time for everyone – you’re not alone. Lenders will likely be more flexible now when it comes to granting accommodations, such as:
- Lowering interest rates
- Lowering payment amounts,
- Pausing payments
- Placing your account in deferment or forbearance
At the end of the day, lenders do not want you to see you or your business go under. If they can help you make smaller or less frequent payments, or simply avoid bankruptcy, it’s often in their interest to do so. Don’t hesitate to contact your lender or creditor to review what options they have available to accommodate your current financial situation.
Get more business aid during COVID-19
Protecting your personal and business credit scores during the coronavirus crisis is just one of the many ways to help ensure your business’s survival. Use these valuable Become resources to defend your small business from the worst that coronavirus has to offer:
1. Join the Become Online Business Owner Community – share questions, answers, info, resources, and ideas with other business owners from all across the country in a variety of industries.
2. Bookmark the COVID-19 Business Funding News & Updates Hub – stay up-to-date on important business-related coronavirus news with this continuous stream of information.
3. Read the Guide to Safe Reopening for Workplaces – it’s only a matter of time before coronavirus restrictions are eased and, eventually, lifted. Get your business prepared to reopen safely with this breakdown of office safety.