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No one knows how long it will take small and independent businesses to recover from the COVID crisis; at this point there is no timeline that allows for serious planning. But what is clear is that those businesses that are able to maintain good credit will find it easier to bounce back as they will have a better shot at getting lower-cost funding to help them ramp back up.
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Here are five tips for keeping your credit strong during these turbulent times:
Know who reports where
Though checking your credit reports may not be at the top of your list at any given point in time, it’s essential that you do so now so you can see which lenders report to which credit reporting agencies—both on business credit and your personal credit.
For example, some small business credit cards report to both business and personal credit bureaus each month, while others only report to the personal credit bureaus if you default.
- Check your full personal credit reports from all three major credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com, the government-mandated free credit report website. It’s now providing free weekly reports.
- You don’t get free scores at AnnualCreditReport.com, so make sure you check your scores elsewhere. Here are more than 138 places to get your credit scores for free.
- Dun & Bradstreet and Experian offer limited free credit reports. You can check and monitor your business credit with D&B, Experian and Equifax at Nav.com.
When you check your reports, look to see which lenders and vendors report payments on a regular basis. You want to prioritize these bills since late payments may have an immediate negative impact on your credit.
Which brings us to the next step…
Protect what matters most
Payment history is the single most important factor in any credit scoring system—business or personal. Paying your bills on time helps protect your credit scores, so do what you can to at least make the minimum payment on time each month. Keep in mind that late payments can generally be reported for up to seven years on personal credit, but there is no limit on how long they may be reported on business credit and each bureau’s policy varies.
Debt levels generally comprise the second most important factor in most credit scoring models. It’s also a factor that can change fairly quickly, though, so if you normally pay your balances in full each month and now can’t, just do what you can. You can always be more aggressive about paying down balances when conditions improve.
Keep accounts active
Creditors are starting to cut credit lines or closing accounts which could, in turn, affect your credit utilization— the ratio between your credit limits and balances. You’re most at risk of losing accounts you haven’t been using. Consider using credit cards and lines of credit for items you would purchase anyway, then pay them off in full. This helps keep the account active, which in turn may mean the creditor is less likely to close the account for inactivity.
Just remember to pay these accounts on time. It’s easy to lose track of bills you aren’t used to paying on a regular basis.
Given that payment history is a priority, try to renegotiate terms if you are having trouble paying on time. Vendors that normally offer net-30 terms may be willing to stretch them to net-45 or even net-60, for example. Some business and consumer lenders are offering deferment or forbearance which allows you to temporarily skip payments that will be added to the term of the loan. (Keep in mind that on most business loans, interest will continue to accrue).
However, if you have certain SBA-guaranteed loans, the SBA will automatically pay six months of principal, interest and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020. Learn more at SBA.gov.
If you do negotiate new terms, get it in writing and make sure you understand how those new payments may affect your credit. Will you be reported as late or on time if you stick to the new payment schedule? Obviously the latter is what you’re aiming for.
Watch for fraud
Crooks are cashing in on coronavirus, putting consumers and businesses at higher risk of fraud. The Department of Justice, Federal Trade Commission and other agencies are warning about a variety of scams including agencies pretending to offer access to COVID-19 relief programs such as small business loans or stimulus payments.
Identity theft is always a serious concern, and now more than ever. To protect both your business and personal credit:
- Consider placing a fraud alert or credit freeze on your personal credit reports for free. A fraud alert will alert creditors to investigate further if someone applies for credit under your name. A freeze will lock down your credit file so new creditors can’t check your credit unless you “thaw” or unlock it.
- You can’t freeze business credit, or even place a fraud alert, so monitoring your commercial credit reports is critical. If you notice any suspicious activity such as new accounts you don’t recognize, you’ll want to investigate immediately to prevent additional fraudulent activity.
While your business navigates these turbulent times, carve out a little time to check, manage and protect your credit. In the long run, you’ll be glad you did.