It’s the sort of thing that is rarely front of mind, but a poor credit profile can put the brakes on a business looking to grow, limiting your access to business finance or making it more expensive.
It’s common for your credit history to be checked when you’re seeking a business loan to purchase say new machinery or fund a business expansion, adds Business Development and Performance Coach Gaylene Hughes, from JDI Business Coaching.
“In the event that you’re buying an asset, a good credit history may mean you can borrow at lower interest rates when the need arises,” says Hughes.
“It’s important to remember that your personal and business credit history are linked and follow you.”
What is a credit profile
It’s best to think of your credit profile by breaking it up into the following two categories:
Credit report – contains information about your credit history including your credit score, current borrowings, all the times you’ve been given credit by a bank or company, unpaid or overdue loans, court judgments against you, and payment and default history.
Credit score – this score is calculated based on your credit report. Each credit reporting agency has its own formula that usually ranges from zero to 1000, but sometimes as high as 1500. The higher the score, the better.
In New Zealand, there are three main credit reporting companies: Centrix, illion and Equifax.
It’s free to get a copy of your credit report, but like most things in life, if you want the information quickly, you’ll need to pay for it.
How to improve a poor credit score
In New Zealand, you have the right to ask for a copy of your own credit report, and check and correct information that’s wrong.
You can request a copy of your report as often as you wish, and credit report companies are obligated to provide it without too much delay. They can charge a small fee if you want the information within three working days, but not more than $10.
If you unexpectedly find out you have a poor credit score, the first step is to look for mistakes and get them corrected.
If you believe that your poor credit rating is the result of fraud, you also have the right to ask that your credit file is ‘frozen’ and not released to anyone without your permission. You can then complain to the credit reporting company.
The Office of the Privacy Commissioner explains that freezing your report should make it more difficult for a fraudster to obtain new credit in your name, as credit providers will usually not grant new credit when they’re unable to do a credit check.
If your poor credit score is not the result of a mistake or fraud, improving your credit score might take time.
Indeed, a default can stay on your credit record for up to five years, even after you have paid the amount in full.
Rest assured though that credit reports include both positive and negative credit history, so there are steps you can take to improve your credit score over time.
8 tips for improving your credit score
Hughes shares her eight tips for improving your credit score:
- Pay bills and make loan repayments on time. “Set up weekly or monthly automatic payments if you can, from an account that’s harder to access.”
- Check for mistakes. Everyone makes mistakes, including credit reporting agencies. So make sure they don’t negatively impact your business by checking your credit report for errors.
- Manage your cash flow. “It’s important you understand your cash flow and avoid any penalty charges, especially for unpaid or partially paid PAYE, GST and tax to the Inland Revenue,” Hughes says.
- Transparency. “If you do get into trouble with creditors, talk to them. They’ll possibly be open to putting a payment plan in place: better to be paid something than nothing.”
- Don’t maintain more debt than you need: You shouldn’t be scared of debt, but too much can be your undoing. “Live within your means. Don’t be swayed by sales talk or a ‘special’ that’s just too good to be true. That can result in overcommitting to things you can’t pay off.”
- Consolidate. “If you have a credit card, ideally pay it off each month. If you have more than one credit card, consolidate the debt onto one card then cut the others up. Carefully manage any corporate credit cards within the business by regularly reviewing and paying these.”
- Know your numbers. “What’s your income and what are your regular outgoings? Live within your means where possible and get some budgeting advice – it’s amazing where you can make savings.”
- Follow up debtors. “Regularly follow up people who owe you money and remember it’s not a good thing to have too many eggs in one basket – do work for more than one customer.”
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