There’s a lot to think about when you run your own business – no surprises there. So, it’s also not surprising that keeping an eye on your personal credit score might be pretty far down the list. If you haven’t already, it might be worth moving it up for review.
But what is a credit rating?
A credit score is an assessment of your financial status which confirms how credit-worthy you might be. The credit rating system works by considering multiple factors, such as debts you might have, regular income, and your dependency on credit.
This information is fed into a credit report which helps to form an overall picture of your financial stability. The higher the score, the better your credit rating, and therefore the likelihood of you being accepted for credit applications such as a loan or mortgage.
Why is a credit score important?
Having a low credit rating could result in you being turned down if you apply for finance (and unfortunately being declined can also negatively impact your score – a vicious circle!). Even having a mobile phone contract or monthly car insurance can be tricky with a bad credit report.
When you’re self-employed, whether as the director of a limited company or as a sole trader, your personal credit score can affect the business’ finance, too. If you need to apply for a business loan, or even if you’re looking for an investor, you may well need to produce your credit report.
For a new business that doesn’t have much credit history of its own, this is even more likely. It makes things much easier if it’s in good health. After all, lenders and investors want to see that they’re putting their money into safe hands.
Does being self-employed affect a credit score?
Whilst the very fact of being self-employed doesn’t automatically hit your credit score, the circumstances of it might. For example, needing to make requests for credit, having a few lean months, and so on.
How to improve your credit score
There’s no quick fix to boosting your credit rating – we’re sorry. But, there are steps you can take which will help it improve over time.
Living within your means is an obvious suggestion, but not doing so means that you’re more likely to burn through cash unnecessarily. Spending money on essential purchases is one thing, but try to curb the aspirational spending until you’ve made it! End of lecture.
Remember, too, that having credit isn’t a bad thing – you can use a credit card, just make sure you’re making more than the minimum payments. Working towards paying it off will demonstrate that you’re responsible with the credit that you already have, and help improve your score.
Simple things like making sure you’re enrolled on the electoral register can help too. It adds to your authenticity and means that you’re more easily verified.
Pandle is an easy-to-use cloud accounting software which helps businesses manage their finances and bookkeeping.