It is easy today to apply for a store credit card that you forget all about in three years - but that account will remain on your credit report and affect your credit score as long as it is open. Having credit lines and credit cards you don’t need makes you seem like a worse credit risk because you run the risk of “overextending” your credit.
Also, having lots of accounts you don’t use increases the odds that you will forget about an old account and stop making payments on it - resulting in a lowered credit score. Keep only your used accounts and make sure that all other accounts are closed. Having fewer accounts will make it easier for you to keep track of your debts and will increase the chances of you having a good credit score.
However, realize that when you close an account, the record of the closed account remains on your credit report and can affect your credit score for a while. In fact, closing unused credit accounts may actually cause your credit score to drop in the short term, as you will have higher credit balances spread out over a smaller overall credit account base.
For example, if your unused accounts amounted to $2000 and you owe $1000 on accounts that you have now (let’s say on two credit cards that total $2000) you have gone from using one fourth of your credit ($1000 owed on a possible $4000 you could have borrowed) to using one half of your credit (you owe $1000 from a possible $2000). This will actually cause your credit risk rating to drop. In the long term, though, not having extra temptation to charge and not having credit you don’t need can work for you.
Do I have to restore my personal credit in order to establish business credit?
You don’t have to restore or repair your personal credit to establish business credit, but it definitely makes things easier. When you build corporate lines of credit with poor personal credit, you get poor quality credit lines, like we’ll discuss below.
When you apply for corporate credit, especially in the first two years, lenders will always ask for the social security number of the owners of a small business, for the purposes of running a credit check.
Once the credit is obtained, it will only report on your personal credit report if it goes into default. Otherwise, the account doesn’t show up on your credit records. Some people call this a loophole in the credit system. Really it makes sense.
When a new company starts building credit, it doesn’t have a credit history. Just like a teenager buying their first car, it needs a credit reference and cosigner. For your business, the credit reference is your personal credit score. THe cosigner is the personal guarantee you give.
To property build business credit, you must start with a proper business entity structure. You must have a legal entity that’s seperate from you as an individual, like a corporation or limited liability company (LLC).
If you’re a sole proprietor, you don’t have a seperate business legal entity. So even if you’ve been in business for years, you don’t have business credit. Surprisingly, many proper legal entities that have been in business for years may not have business credit either.
When building business credit, usually the business owner will be required to personally guarantee business loans that are offered by banks. In fact, when you’re looking for unsecured lines of credit for business, a personal guarantee is inevitable.
Once you establish and build your business credit, you may be able to obtain more loans without a personal guarantee. However, the most readily available sources of business credit will still ask for personal credit information and a guarantee.
However, there’s another kind of unsecured business credit line available. Some business credit lines are trade lines (credit extended by companies that have business to business products or services) are available without personal guarantees, but they are limited in credit limits and availability. Trade lines has to be used to purchase specific products or services, like office supplies.
When you have bad personal credit you can build good business credit, but your credit lines will be lines for borrowers with bad credit. Which means you’ll pay higher interest rate, have smaller lines available, and they will usually be these trade lines.
The bottom line? While you’re building your business credit trade lines, work on your personal credit, don’t ignore it. Having both a good personal credit score and a good business credit score will ensure that you get all of the financing you need for your small business.
You are more likely to notice problems and inconsistencies if you check your credit score on a regular basis - at least once a year and preferably three times a year. Be sure to check your credit rating with each credit bureau, too. If you notice anything odd or anything you don’t recognize (such as a charge account you did not open) report it immediately.
Sometimes, these errors are caused by mistakes made at the credit bureau, but they could be an indication that someone is using your identity. In either case, such mistakes could hurt your credit score. Fixing such errors improves your credit score.
If you think you have been the victim of identity theft, take action at once:
1) Contact the three major credit bureaus and ask to speak to the fraud department. Explain that you have been the victim of identity theft (or believe you may have been) and ask that an “alert” be placed on your file. This will let anyone looking at your report know that you may have been the victim of fraud. It will also mean that you will be alerted any time a lender asks to look at your file - each time a lender does look at your file, it may be an indication that the identity thieves are trying to open a new account in your name.
When the lender sees that the person applying is not you, they will deny the thieves credit and in most cases the criminals will stop trying to access your identity. Most alerts on your file last 90 or 180 days but you can extend this period to several years by asking the credit agencies for an extension of the “fraud alert” in writing.
In some states, you can even ask for a freeze to be placed on your credit score and credit report which will prevent anyone but yourself and those creditors you already have from accessing your file. Any lenders the thieves contact to set up a new account will be refused access and the thieves will not be able to get any more money in your name.
You are entitled to a free copy of your credit report if you have been the victim of identity theft. Be sure to take advantage of this offer so that you can check exactly how your credit has been affected. Dispute those items that are not yours.
2) Call the Federal Trade Commission (FTC) at 1-877-438-4338. This is the special hotline that the FTC has set up to help customers deal with fraud and identity theft. You will be able to get up-to-date information about your rights and advice as to what you can do to improve your credit score and keep in safe in the future.
3) Contact the police. Identity theft is a crime and you need to file a police report (be sure to keep a copy of this report) so that you can help the police potentially catch the criminals responsible. Contacting the police will also give you a paper trail and proof that a crime has been committed. Keeping a paper trail of the crime and your response will make it easier for you to repair your credit if it has been damaged by identity thieves.
4) Contact your creditors or any creditors that the identity thieves have opened an account with. Ask to speak to the security department and explain your predicament. You may need to have your accounts closed or at least your passwords changed to protect yourself.
You may also need to fill out a fraud affidavit to state that a crime has been committed - be sure to keep a copy of this form for your records. The security team of the creditors should be able to advise you as to what you can do. Be sure to note down who you contacted and when so that you have records of the steps you have taken to deal with the crime.
If you have been the victim of identity theft and you are deeply in debt to creditors you never contacted, you will not be held responsible for the charges - but you will have to prove that you have been the victim of identity theft, which is tricky since the thieves are using your name and claiming to be you.
It is a frustrating experience because lenders will want to be paid and you will want to avoid paying for charges you did not run up. Being persistent and keeping good proof that you have been the victim of a crime will help to clear your credit score. In the meantime, however, you will be faced with a much lower credit rating than you deserve and you may have to put off larger purchases that may require a loan.
