1. Pay your bills on time
Consistently paying your bills on time isn’t only a good way to avoid interest and penalties, it’s also the best way to build your credit history, improve your credit score and show your banker you are a reliable business partner.
“Your payment history is the most important aspect of your credit score,” says Arthur Lam, Vertical Market Leader at Equifax Canada, a credit bureau. “Even a slight delay in your bill payment could have an impact.”
2. Have the right credit mix
The credit rating bureaus look at what types of debt you have when determining your credit score. Having too many credit cards, for example, could negatively affect your score, especially if you are using one card to repay money you’ve borrowed on another.
Similarly, opening multiple credit accounts at the same time will have an impact on your credit score. The same goes for making too many credit inquiries with the credit bureaus.
To avoid negatively affecting your credit rating, make sure you only apply for the credit you need and believe you will be approved for. And don’t apply for multiple credit products at the same time.
3. Keep your credit utilization rate low
The amount of credit you use is considered a predictor of default risk and will have a direct impact on your credit score.
In general, the rule on credit usage is that a low utilization is better. Less than 10% is preferred.
“In general, the rule on credit usage is that a low utilization is better. Less than 10% is preferred,” Lam says. “Always pay back credit cards and unsecured lines of credit as soon as possible.”
4. Separate your business credit from your personal credit
Your business credit score is separate from your personal score and includes reports from firms that do business with your company, such as suppliers and financial institutions.
You should separate your business credit from your personal credit as much as possible. Use business loans, your business line of credit and business credit cards to finance investments, purchase supplies and top up working capital.
5. Check your credit report regularly
Credit reports aren’t perfect. Names may be misspelled, other people’s information can end up on your file and debt that you’ve paid can still be listed.
It is good practice to check your credit report regularly. This will ensure the report is up to date, that all the information is correct and that you have not been the victim of fraud.
Your personal credit report can be easily obtained from either of two service providers in Canada—Equifax Canada or TransUnion. Visit their websites to learn how. For your business’s credit bureau report, there are three options—Equifax Canada, TransUnion and Dun & Bradstreet. Because agencies don’t share information, it’s a good idea to review your credit history from all the credit agencies.
6. Avoid debt collection and bankruptcy
Leaving bills unpaid to the point where your debt is referred to collection agencies, your assets are seized or you have to file for bankruptcy will obviously hurt your credit score.
“Always avoid getting into a situation where a creditor will go after your assets publicly,” Lam says. “Collection and bankruptcy are very negative for your credit score. Avoiding that would be critical for having good credit worthiness.”
7. Be patient
Lam says it’s difficult to estimate how long it can take before someone’s credit improves significantly. He advises entrepreneurs to start building their credit history early on.
“Start with a personal and business credit cards and keep utilization low. That will generate the type of history that will be good for both your personal and business credit scores.”