Unfortunately, many business owners unknowingly make grave blunders that impact the credit score of their business. These mistakes not only affect the credit score of the business but also turn out to be costly in the long run. Low credit scores not only make it difficult to secure loans but also lead to an overall increase in the cost of borrowing.
So, it’s vital to ensure that you avoid these common mistakes that damage your business credit score. In this article, we walk you through the common mistakes that ruin your business credit score and the ways to avoid them. Let’s get started!
Mistake #1: Making Late Payments
This is a cardinal sin and must be avoided at all costs. Whether you're repaying the EMI of a business loan or settling the outstanding bill of a business credit card, make sure that you're always on time.
Every time you make a late payment, your business credit score takes a hit and drops by a few points. Ensure that all outstanding payments are settled on or before the due date to avoid a declining credit score.
How to Avoid It: Inculcate the habit of settling bills and payments before the due date. If you're forgetful, you can set up the auto-debit feature on your bank account or use reminders on your phone to alert you before the due date.
Mistake #2: Providing Guarantee for Someone Else's Loan
This can land a huge blow to your business if the borrower doesn't repay the loan on time. Business owners often provide a guarantee for the loans of others – family members, an employee, a friend, etc. In these situations, if the borrower fails to repay the loan on time, it not only impacts the credit score of the borrower but the guarantor as well. In this case, your business' credit ratings take a hit.
How to Avoid It: Be cautious when deciding for whom you're co-signing a loan. Make sure to check the borrower's financial history and his/her ability to repay the loan before agreeing to be a guarantor.
Mistake #3: Closing Old Credit Cards
This is one of the common mistakes that business owners make unknowingly. Closing an old credit card can lower your credit score. Wondering why that happens? When you close an old credit card, it erases the associated credit history from your financial report. Let's say that you have a credit card for ten years. When you close it, it eliminates the associated ten years from your credit report.
The length of credit history is one of the many factors that determine your credit score. Now, when you close the card, it automatically removes the years of credit, thereby leading to a drop in your business credit score.
How to Avoid It: To avoid losing the good credit score that you currently have, it’s highly recommended that you keep old credit cards open, even if you don’t use them.
Mistake #4: Not Checking your Credit Score and Credit Report Periodically
As a business owner, you need to track your credit score and credit report periodically, say once every three or six months. Besides helping you understand where your business stands, this practice makes it easy to spot any errors in your credit report. Failing to check your credit report makes it difficult to rectify the mistakes, if any, on your credit report. If you notice any error in your report, you can bring it to the notice of the relevant credit agency to get it rectified.
How to Avoid It: CreditMantri offers a free Business Credit Health Check. You can use our service to check the score and rating of your business periodically.
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