In Part 1 we outlined the ins and outs of personal credit vs. business credit, and what factors go into making up your credit score. Part II of Credit Scores Explained will give you a crash course on what the three major credit bureaus – Experian, Equifax, and Dun & Bradstreet – use to calculate your score, and how to raise them.
Let’s get down to the nitty gritty.
Dun & Bradstreet
D&B uses a combination of a PAYDEX score, a credit score, and a financial stress score when calculating your business’ credit score
- PAYDEX score: A scale of 0 - 100 that looks at the timeliness of your payments.
- Credit score: Ranges from one to five and compares your company to other companies that share similar payment history to determine your company’s spending habits, and how likely it is that you will pay on time.
- Financial stress score: Ranges from one to five and compares your company to those with similar financial and business characteristics - such as size, revenue, or time in business – and is used to determine the likelihood of timely payments.
Equifax looks at three values when determining your business credit score: payment index, credit risk score, and business failure score.
- Payment index: Assesses your company’s on-time payments, but is not intended to predict future behavior.
- Credit risk score: Looks at how likely it is that your company may become severely delinquent on payments, by looking at business size, available credit, and length of time you’ve held your longest financial account.
- Business failure score: Assesses the likelihood of your business closing by looking at the total balance to total credit limit average, and your worst payment status in the prior two years.
Experian differs from D&B and Equifax in that it takes into account more than just payment history when calculating your CreditScore report.
- CreditScore report: Takes into account years in business, lines of credit applied for and opened in the last six months, collection amounts in the last seven years, and also the number of non-net-30 lines of credit your business holds.
How to Improve Your Business Credit Score
Your business’ credit score is important and should be protected. It is the largest factor lenders look at when deciding whether or not to loan you the funds you need. Having a less than perfect credit score is not the end all be all – there are ways you can improve it. Just remember, it’s going to take time.
- Limit Your Credit Usage: Control your debt-to-equity ratio. Lenders look at the amount of money your business owes to banks and other lenders, and place a lot of weight on that assessment.
- Pay Bills on Time: Paying just a couple of days late can greatly affect your credit score, plus now you’re paying fees. Paying down your current high-balance cards and loans will also help bump your score up.
- Avoid Closing Accounts: You may be tempted to close an account you’ve just paid off. Think twice before doing this because it lessens the amount of credit that has been extended to you, and therefore adversely affect your debt-to-equity ratio.
- Check Your Score Regularly: You can get your business’ credit report for free every 12 months. Monitoring and knowing what is on your credit report will help you identify errors and inaccuracies and get them corrected quickly.
There you have it, everything you needed to know about credit scores. Navigating all the ins and out of credit can be tricky, but it’s very important knowledge to have. The more you know on the topic, the most successful you and your business can be.