Para la versión en español, haga clic aquí. | Jessie Eby contributed to this story.
For many small business owners, personal credit and business finances are closely linked, especially in the early years. Unfortunately, that means poor personal credit can have a negative effect on your business.
The good news? Bad credit doesn’t have to be permanent. Financial recovery is possible, even after hardships.
Note: Business credit is completely different from personal credit and will not be addressed here in great detail. Most small businesses do not have a business credit score and may not need one.
Why is credit important for small business owners?
Suppliers, insurance companies, and lenders check credit scores before offering services or extending credit. Better credit typically qualifies your business for financing with lower interest rates and more favorable terms, improving cash flow and promoting sustainable growth.
How to rebuild your credit
Rebuilding your credit can be a long road, and unfortunately, there isn’t a shortcut. The following steps will help you regain control.
Check your credit report
You can’t fix what you don’t know is broken, which is why it’s important to check your credit report. This report will detail your credit history, including:
- All of your credit accounts (including loans), credit limits, and payment history
- Overdue debts
- Bankruptcies
- Credit inquiries, a history of inquiries made when you’ve applied for new credit. These can be “hard inquiries,” which occur when you apply for a loan or credit card, or “soft inquiries,” which are for things like pre-approved offers. Hard inquiries affect your credit score; soft inquiries do not.
Equifax, Experian, and TransUnion are the three major credit reporting agencies. You can get your free credit reports from all three through AnnualCreditReport.com.
What to look for on your credit report
When reviewing your credit report, take a look at a few key things:
- Personal information: Confirm that your personal information is listed correctly. If there are any discrepancies, be sure to follow up with the bureau reporting the misinformation and correct the errors. Incorrect names or addresses could be a sign that someone has stolen your identity or is attempting to use your information to commit credit fraud.
- Balances: Review all loan and credit card balances along with payment histories to make sure your records match.
- Inquiries: If you see any accounts or inquiries you don’t recognize, it could be an indicator that your identity has been stolen or compromised. If you suspect either has happened, you can get help at identitytheft.gov.
If you find inaccurate information on your credit report, you have the right to dispute those errors with the credit bureaus. Find resources for disputes at the Consumer Financial Protection Bureau or the Federal Trade Commission. Keep in mind that any disputes should be reported to each of the three major credit bureaus: Equifax, Experian, and TransUnion.
Pay your bills on time
Establishing a history of timely, regular payments is the best way to rebuild your credit. Whether you set up automatic payments or pay your bills manually, make sure you always pay on or before the due date.
One missed payment has significant consequences and takes a considerable amount of time to recover from. If you are not able to make a payment, reach out to your lender or credit provider as soon as possible to work out an agreement.
Use credit responsibly
Try to keep your credit card utilization below 30%. If you have cards that are maxed out or have limited credit available, prioritize paying those balances down first or refinancing that debt. Tackling your highest interest rate debt first will save money on interest and improve your cash flow.
Manage debt
An important part of rebuilding credit is managing existing debt. Begin by knowing exactly what you owe; make a list of balances, interest rates, and due dates. Focus on making at least the minimum payment on all accounts, and then determine where to direct your extra funds to speed up repayment.
Commitment to your plan is the key to your success, so however you decide to handle your debt, make sure it is a plan you can stick to. Avoid taking on new debt while you’re rebuilding, and whenever possible, pay more than the minimum balance to reduce your balances faster. Popular debt management methods include the debt avalanche or snowball.
If you have concerns about whether a debt is legitimate, you can visit the Consumer Financial Protection Bureau for a debt validation. This process verifies that the debt is both legitimate and accurate.
Should you consolidate?
Consolidation can be a helpful debt reduction strategy for some, but it isn’t the right solution for everyone. Debt consolidation loans may have fees, higher interest rates, and collateral/security issues. Compare interest rates, loan terms, and total repayment costs. Speaking with a trusted financial adviser or credit counselor can help you decide if consolidation will actually speed up your credit recovery.
Collections
Ignoring old collections can have a devastating effect on your credit score for years. Take care of any past due bills and collection accounts. Either pay them in full or work with the creditor on a payment plan. Get any payment plan agreement in writing, and file it with your important financial documents.
Manage your accounts
Avoid closing old accounts, as it can shorten your credit history and have an effect on your utilization rate. Keep old accounts open and use them lightly, ideally paying off the full balance monthly.
Taking out loans for your small business
Sometimes, small business ownership requires large purchases that owners simply cannot afford. Buildings, vehicles, and large equipment are all investments that are difficult to pay for up front and entirely out of pocket.
If you do need to take out a loan, borrow only the amount you need and choose your lender carefully. The Center can work with you to create a plan that fits your needs.
Every credit journey looks different, and rebuilding takes time. With regular, timely payments, reduced credit utilization, and limited credit inquiries, you’ll strengthen your credit profile. Stay consistent—the steps you take today will build your financial stability for the future.
