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These days, good credit isn’t enough. The average person can save more money and get more options than they think just by improving their credit. People who are launching new careers, businesses, or major creative projects are not “average” people, though. For them, outstanding credit is critical to their long term financial stability. In fact, achieving outstanding credit is the first key step to success in any business or creative startup. This is because the interest rates charged on various types of accounts including business loans, mortgages, home equity loans, auto loans, credit cards and even insurance are dictated by your credit score. The higher your credit score, the less you pay. And the less you pay, the more profitable you will be in both your business and personal life. Aside from the few borrowers who fall into the “stellar” credit realm, typically considered to be a 760 FICO score or above, most entrepreneurs can benefit from credit improvement resulting in major savings down the road. Fortunately, improving your credit score can often be achieved in 5 steps or less.

Step 1: Pay your bills on time.
Late payments have a huge impact on your credit score. In fact, payment history is the number one factor in determining your credit score. Late payments can also severely impact your ability to fund a business or creative project. If you are behind on payments, get caught up and stay caught up. The longer you have a history of paying on time, the higher your score will be. There is a common belief that it’s okay to pay late as long as you are paying the balance in full. This is simply not the case. A late payment that paid an account in full will count against you the same as a late payment that paid only the minimum due. In addition, late payments on some types of accounts have more of an impact than those of others. For example, a late payment on a mortgage account will have a worse impact on a credit score compared to late payments on other types of accounts. Following is the prioritization of accounts in order of highest impact on credit score to least: mortgage loans, home equity loans, auto loans, installment loans, credit cards, and then other various account types.

Step 2: Keep your account balances low.
Amounts owed are the number two factor in determining your credit score. For the best results on your credit score, keep your balances below 40% of your available credit on your credit card accounts. Once your balance is above 40% of the available limit, you start losing points off your score. Often we see a client who has five credit cards, four of which have zero balances and then one that is basically maxed out. This could be a situation where all of the account balances were transferred to the account that offered the lowest interest rate. Consolidating debt onto one low interest rate card can be an excellent way to save money but, if this results in using more than 40% of the available credit on that one account, your score will drop. In a case where your number one priority is to improve your credit score, an alternative would be to distribute the balance across several of the accounts so that you do not exceed the 40% threshold on any of them. Another option is to contact the creditor and request an increase in available credit, resulting in an automatic decrease in the percentage of credit used (assuming you don’t increase your balance owed.)

Step 3: Pay down your debt.
It’s important to pay more than just the minimum payment due each month so that you can eventually pay off your debt all together. As your amounts owed are reduced, you may see a quick boost in your score. For example, paying down $750 on a $2200 credit card balance could raise your score as much as 20 points. Think of practical ways that will help you to pay down your debt. I suggest a two fold approach. First, think of areas where you can eliminate unnecessary spending, both business and personal. For instance, one area might be eating out. Eating out one less time a week could save you over $2000 a year (based on dinner for two at $40 total per dinner.) The second step is to make the debt reduction automatic. If you’ve eliminated $200 a month in spending, set up an automatic monthly payment on the account that has the highest interest rate and have that automatic payment include an additional $200 a month on top of your usual payment amount. You will find that this quickly adds up and results in noticeable improvements both in your debt situation and on your credit score.

Step 4: Keep your oldest accounts open.
Length of history is the third most important factor that goes into your credit score. The longer you can show you’ve been managing good credit, the higher your credit score will be. One mistake that many people make is to pay off an account balance and then promptly call to have the account closed. What they don’t realize is that, if this is one of their older accounts, doing so will actually cause their score to drop. Therefore, before you close an account, check the date it was opened and be sure to keep the older ones open.

Step 5: Fix errors on your report.
Errors frequently show up on credit reports and many have a negative impact on credit score. Because of this, it’s important to review your report annually and to address any such issues immediately. For advice on correcting errors, “7 Steps to Fixing Your Credit Report,” an article by Holden Lewis of Bankrate.com, is an excellent resource.

Don’t be discouraged by the fact that improving your credit score takes specific steps, work, and time. Each positive step you take will increase your credit score. People frequently see powerful changes within as little as 3 – 6 months. Ultimately, this will mean more opportunities and financial stability as you build your business and career.

Additional Resources
myFICO.com
The most comprehensive resource for credit education. Provides information, tools and products to help you become a credit genius.

AnnualCreditReport.com
An excellent resource that offers free credit reports from all three credit bureaus.

How to Go From Credit Repair to Credit Millionaire by Donna Fox. Covers credit repair and building business credit.

The Automatic Millionaire and The Automatic Millionaire Workbook by David Bach. Two resources on money basics, including credit, by one of the foremost money gurus.

The Money Book for the Young, Fabulous, and Broke by Suze Orman. Excellent resource on money, credit, planning, and investing for people in their 20’s and 30’s who are just starting out.

Michelle Webb, The Credit Coach, helps individuals getting ready to launch business or creative startups to reduce stress, save time & money, and reach their dreams faster by making them financially stronger for life while boosting their credit power today. Through extensive one-on-one credit coaching, she teaches you about credit and money, makes them easy to understand, and looks at the whole picture so you can draft a long term plan. Michelle knows the road to financial achievement and provides the resources to get you there! For more information on credit coaching services, contact michelle@yourcreditpower.com

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