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Access to Finance

How can Individuals and Small Businesses Manage their Credit Scores?

In this time of rising costs, both domestically and for companies, it’s important that individuals and small businesses manage their access to finance. This is where your credit score comes in.

A credit score is a tool lenders use to determine whether a person can qualify for a financial product like a loan, credit card, mortgage or insurance.  

The credit history and credit score is a report compiled by credit reference agencies (CRA), such as Experian, Equifax and TransUnion in the UK, to reflect a customer’s borrowing and repayment behaviour. Based on this score, lenders will assess the risk of lending money to an individual. Customers with good or excellent credit scores are more likely to be offered financial products with a lower interest rate than customers with poor credit scores.  

For an individual, credit reference agencies will consider five different criteria to determine your credit score, including your payment history, the amount you own, the length of credit history, the type of credit you own and the application for new credit. In the case of small businesses, if you are a sole trader, lenders will use your personal credit score to determine your creditworthiness. However, if you set up a limited company, you can build your business credit rating independently. The agencies might also consider the business’s five years financials, including turnover, profit and loss, etc. In addition, the business’s trade payment histories, such as how quickly your customers pay their invoices and the number and value of overdue or late payments, will also be another factor for consideration.   

In those five criteria, two of the most influential factors for an individual’s credit score are your payment history and the amount you own; each contributes to one-third of your credit score. On payment history, the agencies will consider whether an individual’s previous lines of credit have been repaid in a timely and responsible fashion; this can include loans, credit cards, mortgages and household utility direct debits. The credit reference agency will also consider using lots of available credit lines as a sign that the borrower has over-extended and that there is a high risk involved in lending money to this individual. 

To improve your credit score, you should regularly check your credit history for accuracy – this can help avoid mistakes and improve your credit rating. Disassociate from any ex-financial partners by informing one of your chosen credit reference agencies and close any unused lines of credit, including store cards, credit cards and mobile contracts. If you need to apply for different lines of credit, it is always better to space out your applications, as several applications in a short time can flag up as a risk for the agencies. In addition, registering for the electoral roll may be a small step, but it will help to increase your credit score and be approved for credit. More importantly, paying more than the minimum requested payment on credit cards each month will be taken as a show of commitment to paying off the balance.  

Making late payments can be detrimental for your credit score; a single missed payment can affect your credit score for several years. In addition, try to avoid drawing cash from a credit card wherever possible as it is expensive since the interest rate is much higher, and it could be viewed as a sign of poor money management. You should never bury your head in the sand and hope your credit score and history will improve. However, never pay for a credit repair company, as they can only do as much as you can to improve your credit score and history. Instead, turn to a non-profit debt advisory agency.  

Experian, one of the major CRA in the UK, also mentioned on their website, Just like personal credit scores, small business should also actively manage their business credit score to secure their access to finance. First, you should share your company’s information so agencies can validate all the data on your record. In addition, you should always ensure your personal finances are healthy. If you are a start-up with little financial information, the agencies may use data from your personal accounts to calculate your business credit score.  

Only submit credit applications when necessary. It can be tempting and sometimes essential to explore the finance options available for your business, but submitting too many in a short period of time could suggest that you’re struggling to secure funding. This can also trigger a credit search on your business, which is recorded on your credit record and can impact your credit score. 

Regularly check your business credit score and sign up for alerts that notify you when your credit record changes. Then you can act fast to rectify any problems. Keep track of the business credit score of your partners, suppliers and customers, too, limiting damage to your business should they fall into financial difficulty. If you have a good working relationship with your supplier, it would be a great help if you could collaborate by asking them to provide feedback and share payment record data with the agencies.

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