Glossary of Business Credit Terms

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Credit History

What Is Credit History?

In order to start a new business, buy a home or improve the lifestyle, you might want to take out a loan. For this purpose, banks and lenders use credit history to determine if you're trustworthy candidate. Credit history is a record regarding how do business or consumer uses their money, credit cards they own, amount of loans they owe, and whether they pursue on-time payments or not. Usually, all of this information is recorded in credit reports.

Credit report is all about your business or personal history as a debtor. If you have a history to repay loans on time, lenders expect that you will do the same in future. Similarly, defaulting on a loan and missed payments may hurt your credit.

How Is Credit History Used?

  • Generally, the credit history is used to generate credit scores like your FICO score.
  • Lenders use credit history to determine your potential to acquire credit.
  • Credit history is also used to evaluate terms of credit granted, for instance, the interest rate.
  • Credit history also influence more than your ability to obtain credit. Landlords use credit history to assess whether to rent an apartment to you or not. Utility companies also evaluate an individual's ability to decide whether to provide their services or not.

How to Calculate Credit History?  

Your credit history is calculated by using all information on your credit profile. A score is used to signify and summarize all your financial details. This credit score determines the quantity of risk a candidate is to the creditor.

There is a special math formula used by credit bureaus to calculate the credit score. Credit score calculation is based on the FICO credit score model. There are several score models out there, however FICO is the standard. By far, it is used by 90% of lenders and by the three major credit bureaus. Credit history is evaluated from last 2 years up to 7 years. Credit bureaus usually employ these five parameters to assess an individual.

  • Repayment history - 35%
  • Credit balance - 30%
  • Timely payment of loans - 15%
  • New credit taken - 10%
  • Credit Mix - 10%

The Importance of Credit History

Being the key element of your credit reports, your credit history holds immense value because lenders, insurance companies, and employers access credit reports to know how someone is managing financial responsibilities. While a strong credit history can help you qualify for lower interest rates, it is also essential for qualifying for a home loan, getting a credit card, renting a car and sometimes even getting a job. Individuals with a low credit score could also get approved for financing yet at higher interest rates.

How does Personal Credit History Affects Business Credit Score?

Having a good credit score is important. However, it doesn't really affect your business credit score. This is because personal credit is based on social security number whereas business credit is tied to business’s EIN number or credit bureau's identification number. However, there are times when both personal and business credits are linked. This occurs when lenders look at variety of metrics for a business loan request.

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