Finance 101 - 11.9.2015

What is a Good Credit Score?

And how can I improve mine?

What exactly is this mystifying three-digit number that comes to help (or haunt) you throughout some of the most critical times of life? This number greatly impacts:

  • Buying a car
  • Signing a lease agreement
  • Purchasing a house
  • Applying for a loan for your small business

What Makes up a Credit Score

Also commonly referred to as FICO, your personal credit score is made up of five distinct categories that contain both positive and negative information about your financial history. This score reflects your:

  1. Payment history
  2. Amounts owed
  3. Length of credit history
  4. New credit
  5. Types of credit in use

The relative importance of each category - and how your overall score is calculated - is reflected below:

Able Lending - Fico Credit Score

Note that the importance of these five categories may vary from person-to-person. For example, people who have a short credit history will be factored differently than those with a longer credit history among these categories. The importance of any one factor in your credit score calculation also depends on the overall information in your credit report.

How To Improve Your Credit Score

We recommend you check your credit report at least once every quarter. This is the first step to improving your credit. You can check for free using a tool like CreditKarma, which won’t impact your score. Make sure that:

  • There are no late payments incorrectly listed for any of your accounts.
  • The amounts owed for each of your open accounts is correct.

If you find errors on your report, dispute them with all three national credit bureaus here: Experian, TransUnion and Equifax.

Next, make paying on time a priority. Payment history is one of the biggest contributing factors to your credit scores. We suggest setting up reminders each month, or automatic payments through your bank.

Finally, reduce debts you owe - which is easier said than done. If you have a larger balance than you’d like to see, stop using your credit cards and make a list of each card’s balance, rate, and the amount owed. Next, create a payment plan to reduce your balances, prioritizing paying off the cards with higher interest rates first.

What Is A Good Credit Score?

A personal credit score of 700 or higher is typically considered good. However, each lender uses a different set of standards to define what is “good.” Be sure to know your credit score before approaching a lender as many (including Able) use your estimated score to quote interest rates and loan amounts.

As a small business owner, it's also important to understand that just like personal credit scores, business credit scores are also available and used by lenders to make decisions.

While it's likely that your personal credit score will play a more important part in the decision, it's a good idea to check your business credit score as well. You can do so with Experian’s free Business Score Planner tool.

How Able Values Personal Credit

The basic question behind all credit decisions is simple: Will this person pay me back? The answer to this question is called the “price of risk,” which determines the interest rate - or the price - of the loan.

Today, only big financial institutions - i.e. the voice of the critic - are answering this question, pricing entrepreneurs out of the market, or worse, compelling them to take on high-interest debt (that ironically makes them more risky). This is because of their inability to adequately price risk.

At Able, we believe credit is owed to the entrepreneur in the arena. Instead of turning to the critic in the crowd, we turn to the wisdom of the crowd in order to help price risk through what we call “collaborative underwriting.” Able takes a holistic approach to reviewing small business loan applications. While we do look at your personal credit score, it is only one of several factors we use to assess risk, and make our loan approval and pricing decisions.

We review hundreds of data points about the entrepreneur and his or her business, and rely heavily on Backers - the three to five people who contribute ~25% of the total loan amount. In essence, Backers are vouching for the borrower by proving their belief with a financial commitment. In return, they receive monthly interest payments for their support.


Want on-the-go tips for growing a small business? Listen to our podcasts on Able Radio.


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