Small business owners need access to all the capital they can get. Sometimes, investors fill the void, but in many cases, entrepreneurs must find funding on their own. Small business loans and credit cards provide freedom and flexibility to pursue short windows of opportunity and keep young companies afloat.
Not all founders qualify for the lines of credit they need, though. You may run the company under its own name, but your personal credit history can play a major role in whether banks approve your application. Even if you manage to qualify for a business credit card with poor credit, you can’t do much with a $1,000 limit.
While several factors help bankers determine your creditworthiness, one of those factors — credit utilization — plays a bigger role than most. Your credit utilization makes up around a third of your total credit score. Fortunately, while other credit factors can take years to change, you can completely revamp your credit utilization with a few easy moves.
What Is Credit Utilization?
Credit utilization refers to the amount of your available credit currently in use. For example, someone with a $10,000 credit card limit and a $3,000 outstanding balance would have a 30% credit utilization rate. It’s a ratio, which means it doesn’t matter how high your limits are, only what percentage of your limits you use.
Utilization only accounts for revolving credit lines, like credit cards. Lines of credit like mortgages and personal loans don’t affect this part of your credit score.
If you’re not sure whether a certain type of credit counts, consider whether you can use it at will. You can’t throw your mortgage equity around like cash, but you can rack up charges on a credit card in a few minutes.
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