How good does a credit score need to be for getting a loan?
Q: How high does my credit score have to be for me to get a smallbusiness loan?
A: Generally speaking, you’ll need a credit score of at least 680, although that can vary. Larger banks may want to see a higher score, while smaller community banks may be willing to work with you if you have a lower score. The amount and type of loan may come into play as well. And although you may still get a loan if your score is relatively low, it will definitely impact the interest rate you’ll pay. In fact, borrowers should be wary of some of the newer alternative online lending platforms that offer easy access to funding but often at fairly exorbitant rates.
There are ways to up your score if you’re worried that it’s too low. But to do that, you have to be aware of what goes into your score. One of the most important factors is your payment history. A lender will want to know that you are going to be able to make your loan payments, with the agreed-upon monthly amount paid on time. Your payment history shows how you’ve done with that, and counts toward about a third of your credit score.
The second most important factor, worth about another third of your score, is the amount of money you already owe. If you’re maxed out on all your credit cards, that’s a red flag. A lender will want to know that you still have credit available.
The other third of your score involves the length of your credit history, your credit mix, and new credit. A lender will want to see that you’ve handled credit well, which means you need to have some credit cards and/or loans, but again, you’ve had to have made your payments in a timely manner and not let your debt add up. Having a variety of credit cards and loans can also improve your score, but the lender won’t want to see that you’ve opened several new accounts in a short period of time. That can mean you’re juggling your payments, and can bring your score down.
So to improve your score, take a look at how you’re handling these various credit components and take steps to do better if possible. For tips, attend the UH Bauer College SBDC’s Strategies for Financing Your Business. The three-hour session on Wednesday will be taught by Rebecca Schultz, Commercial Loan Officer at TDECU, and will cover what goes into your credit score, what constitutes a good score, how to improve your score, and how your score affects you and your business. You’ll pay only $19 when you register and pay online at www.sbdc.uh.edu. The SBDC is on Fannin Street in midtown Houston.
Jacqueline Taylor is deputy director of the Texas Gulf Coast Small Business Development Center Network, a partnership of the U.S. Small Business Administration and the University of Houston C.T. Bauer College of Business. Information is intended to provide general guidance only. Send questions to jtaylor@uh.edu.