Your credit score has a big impact on what you can or can’t do in life. With a high credit score, practically nothing finance-related is out of your grasp, but if your credit score is low, you might have trouble accessing basic financial products like credit cards and mortgages.
While many business owners are unaware of this fact, your company has a credit score too, and this gauge of your creditworthiness affects your ability to access financial services just as much as your personal credit score. There are in fact, some ways that your personal and business credit scores overlap, and in this guide, we’ll cover all the details you need to know to check and improve both your personal and business credit scores.
What Is a Credit Score?
A credit score is a numerical representation of the creditworthiness of a person, business, or other type of legal entity. In the United States, these scores are standardised using FICO algorithms, and these algorithms are also used to some degree in the United Kingdom. In the UK, however, there is no standardised credit score calculation system, so credit scores vary more widely among reporting agencies.
Credit scores are calculated and disseminated by companies called credit bureaus. Examples of prominent credit bureaus include Experian, Equifax, and TransUnion, and these companies draw upon an entity’s past experiences with credit to determine its current creditworthiness.
A credit score is also, essentially, a predictive scoring mechanism used to determine an entity’s future creditworthiness. Since the process of offering credit is always predicated on the borrower’s future ability to pay back loaned capital, using a credit score to determine creditworthiness can be considered a predictive measure.
Credit scores aren’t the only tools that financial institutions, landlords, and other entities use to determine the creditworthiness of a consumer or a business. At the same time, however, it’s practically impossible to qualify for lending without an established credit score. Whether you’re representing a business you own or yourself as a consumer, having a higher credit score will give you access to higher loan limits and better repayment terms.
What Is a Personal Credit Score?
Your personal credit score is the numerical designator that a credit bureau assigns you based on your past lending history as an individual. Factors like payment history, derogatory remarks, and a number of opened credit lines all impact your history. Actions like paying your bills on time, utilising less than 30% of your available credit, and handling multiple lines of credit simultaneously demonstrate that you’re responsible with credit, and these actions will drive your personal credit score higher.
In the UK, credit bureaus are sometimes called credit reference agencies, and the three major bureaus in the United Kingdom are Equifax, Experian, and Callcredit. These bureaus use slightly different algorithms and criteria to determine consumer credit scores, but at the same time, the process of determining your personal credit score in the UK is reasonably standardised. Whether you’re looking at your Experian or Equifax score, for instance, it’s easy to find your personal credit score with a little bit of looking online.
Lending agencies in the UK will look at all three of your scores to determine your eligibility for financial products. As a UK consumer, therefore, it’s a good idea to keep track of each of your scores to make sure you’ll get good rates and even better credit limits.
What Is a Business Credit Score?
Your business credit score is calculated based on the finance decisions you’ve made as a business. Equifax and Experian can calculate your business credit score as well as your personal credit score, and another company, Dun & Bradstreet, also provides this service.
Just as lenders and other relevant entities will use your personal credit score to determine your eligibility for finance, you’ll need to have a good business credit score to access financial services as a business operating in the UK.
Differences Between Personal and Business Credit Scores
As a business owner, you’ll need to maintain close awareness of both your personal and business credit scores to make sure you remain eligible for finance. Your business credit score, however, is quite a bit different from your personal credit score.
For instance, some credit reference agencies might report your personal credit score on a scale from 300-850. Your business credit score, on the other hand, is usually calculated on a scale of 0-100. In addition, getting your business credit score isn’t free; the three major firms that offer this information in the UK each charge a small fee to view your business credit reports.
While your personal credit score is private in the UK, anyone can request your business credit score with or without your consent. UK citizens are accustomed to a lack of standardisation among the reporting schemes used by the various credit reference agencies, but business credit scores vary even more widely than personal credit scores in terms of the algorithms and numerical scales that are used.
The most important difference between your personal and business credit score is the scope that each scoring system covers. Your personal credit score reflects your finance history as a consumer, and your business credit score reflects your finance history as a company. It’s rare for these two scoring criteria to overlap, but we’ll explain why you’ll need to keep both your business and personal credit scores high as we continue.
Why Is Your Credit Score Important?
Your credit score determines your eligibility for lending, and it also impacts your access to housing and workspaces. Here are some of the ways that your personal and business credit scores might affect you in various areas of life:
1. Importance of Your Personal Credit Score
Your personal credit score is used to determine your eligibility for types of personal credit like credit cards, auto loans, and mortgages. Securing housing is difficult if your personal credit score is low, and not allocating adequate attention to this gauge of your creditworthiness will also create needless friction in other parts of your life.
2. Importance of Your Business Credit Score
Lenders use your business credit score to determine your creditworthiness, which is a measurement of the likelihood that you will pay back what you borrow. Without a reasonably high business credit score, you will have trouble securing finance products in the UK, and you may also have a hard time finding an office space to rent and experience other unnecessary hurdles.
How Do Your Personal and Business Credit Scores Affect Each Other?
Your business and personal credit scores do not affect each other directly. Your personal credit score is not penalised if your business credit score is low, and your business credit score does not rise when your personal credit score is high. There are, however, a few ways in which these creditworthiness gauges indirectly affect each other.
When you’re first starting out with your business, for instance, it’s natural to use your personal credit to secure financing for your fledgling company. Most lenders don’t offer loans to businesses without credit histories, after all, so relying on your personal credit score to secure financing for your startup is only natural.
If your personal credit score is low, however, you’ll have trouble securing financing for your business. Therefore, you’ll have a hard time establishing a business credit score, which is one way that having a low personal credit score might impact your business credit score.
Additionally, most lenders don’t look at only your business credit score as they determine the creditworthiness of your company. They also look at your personal credit score, so even if you have a spotless business credit score, lack of consumer creditworthiness will count against your firm’s lending eligibility. That’s another way in which a low personal credit score might harm your business creditworthiness.
Rarely, a lender might use your business credit score to determine your creditworthiness as a consumer. If you disclose that you have a business during a loan application process, for instance, your lender might take a look at your business credit history to make sure that your firm doesn’t have a crazy amount of bad debt that might impact your repayment ability.
Credit Score Calculation Guide
How do credit reference agencies calculate your credit score? The process is slightly different for your business and personal credit scores, but mastering all the factors that credit reference agencies take into account will help you keep your credit score high.
How Is Your Personal Credit Score Calculated?
In the UK, there is no standardised method for calculating your credit score. Instead, each of the major credit reference agencies calculates your personal credit score using its own criteria. In the end, however, these three agencies follow procedures that are similar enough to each other to generate relatively standardised results.
To determine your personal credit score, a credit reference bureau will take a look at the number of credit lines you’ve opened, the average age of your credit lines, and how frequently you make payments on time. Your current credit utilisation is also factored into the equation, and it’s generally recommended that you use less than 30% of your available credit to avoid penalties.
Lastly, the reference agency will also factor in the number of times interested parties have performed hard inquiries of your credit score within the last 1-2 years and any derogatory remarks that lenders or other relevant entities may have made about you in the past. These various factors are then balanced against each other and rendered into a single numerical score.
How Is Your Business Credit Score Calculated?
The process used to calculate your business credit score varies widely among the three major business credit reference agencies. Where all three agencies see eye-to-eye, however, is in their use of a simple 0-100 scale to describe your overall creditworthiness as a business.
Experian, for instance, factors in your court dealings as well as your business finances to determine your business credit score. Other agencies, however, might simply stick to your history of on-time payments and other basic criteria as they determine where to place you within the creditworthiness spectrum.
In addition to providing a composite score ranging anywhere from 0 to 100, each of the three major business credit reference agencies in the UK also provides some form of a “credit risk score,” which is based entirely on your past financial dealings as a business. The higher this score is, the less likely you are to default on payment or otherwise provide lenders with irritating hassles.
This sub-score is accompanied by another metric that’s usually called a “business failure” or “financial stress” score. This measurement usually ranges from 1,000 to around 1,600, and it represents the likelihood that your business will fail in the next 12 months. Credit bureaus use data like your current credit utilisation and history of making late payments to determine your business failure score.
How to Check Your Credit Score
There are a wide variety of ways that you can check either your personal or business credit score. Here’s our simple guide to getting the information you need:
How Do You Run a Personal Credit Score Check?
It’s free to get your personal credit report, and a variety of third-party UK companies provide this information online. Clearscore is one of the most popular tools, and with a little bit of personal information, this service can provide you with your personal credit score information from all three major agencies.
Additionally, you can get your credit score information from the agencies themselves. You can go to the Experian or Equifax UK websites, for instance, to get your personal credit scores for free. When you choose to work with an individual credit reference agency directly, however, you can only view the credit score assigned by that agency.
How Do You Run a Business Credit Score Check?
Checking your business credit score isn’t free, but at least it’s easy. To get started, visit the webpage for one of the three major business credit reference agencies in the UK:
Each agency provides detailed information on how to get your business credit score and how much it will cost. In most cases, it’s possible to pay once to gain access to your credit score for six months or a year. There are no free tools that combine the data provided by all three business credit reference agencies; if you want to see what Equifax, Experian, and Dun & Broadstreet all have to say about you, you’ll have to pay each agency in turn.
How to Improve Your Personal and Business Credit Scores
Knowing how to access your personal and business credit scores is only half the battle. To get the type of financing you desire, you’ll also need to know how to repair your credit scores. Even if both your business and personal credit scores are high, you’ll still need to take measures to keep yourself in the clear. Here’s how:
1. Always Pay on Time
Ultimately, your creditworthiness boils down to the likelihood that you’ll pay back your debt without a hitch, and your history of on-time payments is the single most decisive factor in determining the likelihood of future payments. Even a single late bill or vendor payment can harm your personal or business credit scores, so make sure that you pay your bills on time, every time.
What lenders are especially wary of, however, is a recent history of late bill payments. If you were struggling financially a few years ago but things have straightened out now, continuing to make payments on time will gradually reduce the impact that late payments have had on your business or personal credit scores.
2. Open Multiple Lines of Credit
Lenders don’t just want to see that you can handle credit; they want to see that you can handle multiple lines of credit at once. Whether it’s your personal or business credit report, only having one or two lines of credit will count against you. Once you have more than four lines of credit and you haven’t closed any of them, however, your lending eligibility will start to increase, and companies or consumers who have in excess of eight lines of credit are given the best loan terms. Remember that everything falls apart, however, if you have lots of lines of credit that all have delinquent payments!
3. File Your Business Properly
A simple mistake such as failing to license your company can seriously impact your business credit score. If your business isn’t properly filed, in fact, you won’t have a business credit score at all, and your personal credit score could even suffer. The first step in establishing your business credit score is always making sure that your company is properly licensed.
4. Make Sure Your Personal and Business Finances Are Separate
Once your firm is licensed and you have a business credit score, you’ll be able to improve both your personal and business creditworthiness measurements by keeping your work and consumer financial transactions separate. From separate credit cards to separate bank accounts, financially differentiating your business and personal expenses will help you build your business credit score and ensure that your personal credit score won’t run afoul of the complications inherent to the volatile world of founding and managing startups.
5. Give Credit Reference Agencies the Information They Need
Credit bureaus can only make determinations based on the information you provide. If you have a business vendor that doesn’t submit invoice payment notifications to credit reference agencies, ask them to start. The more information you provide to credit bureaus, the easier it will be for these agencies to assign you a positive business credit score.
6. Don’t Let Data Breaches Slow You Down
Data breaches affect consumers and businesses alike. The 2017 Equifax data breach, for instance, affected nearly 150 million people worldwide, and the reduced credit scores these customers suffered as a result simply added insult to the injury of having their data stolen. While data breaches generally aren’t your fault, they can affect both your personal and business credit scores negatively, which is why it’s vital that you take measures to protect yourself from breaches before they happen.
Credit Scores and CreditDigital
Securing the financing you need to grow your business can be difficult when you take traditional approaches. When you choose CreditDigital, however, you get the working capital you need to get things done, and it’s your customer’s credit that comes under scrutiny, not yours.
CreditDigital is similar to invoice finance in that our service provides you with your invoice value up front without having to wait for payment. Unlike traditional invoice finance services, however, CreditDigital provides you with the full 100% of your invoice amount, and the application process is quick and easy for both you and your customers.
Once you’re a full-fledged CreditDigital customer, you’ll be able to install a “Pay with CreditDiigital” button on your checkout page that’s just as easy to use as PayPal or Amazon Pay. Your customers have up to 12 months to pay their invoices, and you get all the money you’re owed without having to wait. Instead of resorting to traditional finance options that require established business credit scores, get the cash flow you need with CreditDigital!
Here are some related terms you should look into as you work to improve your personal and business credit scores:
1. Credit Bureau
Usually called a credit reference agency in the UK, a credit bureau is an independent organisation that provides credit score information to consumers and business entities.
Your credit score is one tool for determining your creditworthiness, but your eligibility for lending is also dependent on a variety of other factors. You can generally improve your creditworthiness by making payments on time and using credit responsibly.
3. FICO Score
While UK credit reference agencies may base their credit scoring criteria on the FICO model, this scoring system is considered to be the gold standard in the USA and a variety of other countries. In general, your FICO score should be roughly the same as your Equifax, Callcredit, or Experian scores.