How to improve your credit score

Having a poor credit profile can be a handbrake on any business looking to grow, limiting your access to finance or making it more expensive.

The stronger your credit profile, the more likely your business finance application will be approved, and you’ll generally have a greater choice of the type of finance available to you, explains business coach Amy Chen.

Steve Morrison, owner of The Loan Operator, says a phrase he often hears from lenders is: ‘we price relative to risk’.

“So it stands to reason the stronger your credit profile, the cheaper the money,” he says.

Understanding your credit profile

It’s best to think of your credit profile broken up into the following two categories:

Credit report – contains information about your credit history, including your current borrowings; the times you’ve applied for credit; unpaid or overdue loans; court judgements against you; and payment, bankruptcy and default history.

Credit score – this score is calculated based on your credit report. Each agency has its own formula that ranges from zero to 1000 or 1200. The higher the score, the better.

To check your credit score, you can obtain a free copy of your credit profile once a year from each of the three major Australian credit reporting agencies, Equifax, illion and Experian.

Improving a poor credit score

If you do have a poor credit score, Chen says your first step should be to look for errors in your report.

“Mistakes happen all the time. Sometimes late payments are reported by accident or your profile hasn’t been updated with any loan arrangements that you’ve agreed to with your credit provider,” Chen says.

“There have also been cases of identity theft that have been picked up by listings on a credit report.”

Chen advises you should check for errors at least once each year as recent errors are typically easier to rectify, and you likely won’t be under time pressure if you’re waiting on a finance application.

The long-term approach

Improving your credit score will take time. Indeed, payment histories stay on your credit report for two years, says Chen, while serious infringements can take up to seven years to be removed.

Rest assured though that there are steps you can take to improve your score over time, adds Chen.

“The key is being diligent with paying your bills and obligations on time and demonstrating the behaviours of a good borrower because that’s what credit providers are looking for,” she says.

7 tips to improve your credit score

Here are seven tips from Chen and Morrison for improving your credit score:

1. Pay your bills and make your loan repayments on time. “Even a bill as little as $150 can be reported as late if it’s outstanding for more than 60 days,” Chen says.
2. 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.
3. Manage your cash flow. “Planning your cash flow will alleviate stress and pressure because you’ll know what bills are coming up and have cash set aside to pay for them. Keep a buffer for unexpected expenses, and keep an eye on your debtors’ outstanding accounts,” Chen says.
4. Transparency. “Maintaining supplier relationships not only means you’ll have a better chance of securing more favourable terms… The same applies with loan repayments – speak to your lender before you breach terms.”
5. Maintain and comply with the debt facilities that you have. “You need to have an ongoing credit facility to maintain your credit score and be considered credit active, otherwise you may be starting from scratch again. As for all debt in your business, make sure it’s appropriately sized and on terms that are workable for you and your business,” Chen says.
6. Don’t maintain more debt than you need: “Don’t be scared of debt, but too much can be your undoing. Not only will your credit score be negatively affected, but lenders will also see you as a higher risk if they believe you have more debt than you can handle,” she says.
7. Close and destroy any unused credit cards: “And if you have a high credit card limit and never get near the limit then reduce the card’s limit,” he says.