Balances: Rule of Thumb
The industry rule of thumb for personal credit cards is never to carry a limit to balance ratio above 35%. For example, if you have a personal credit card with a $10,000 limit, your balance should not exceed $3,500. Balances over the 35% ratio will begin to drop your credit scores and lenders will
focus in on the “high” debt.
If you are going to make a large purchase, or carry a large balance on an account, make a big payment. Lenders like to see more than the minimum payment made on large balances, in what they call “aggressive payments”.
Business Credit is Different
The 35% rule does not apply to business credit, however. With a few exceptions, most business credit lenders do not report the business accounts to your personal credit report. This is so that you can utilize the business credit freely without being penalized for running your business.
Lenders understand that for businesses, there will be higher balances and a larger number of transactions. If you do that with your personal accounts, the lenders see it as high utilization – and a lending risk. Lenders don’t want you to overextend yourself, and if you are maxed out on your
personal accounts and applying for more credit, it will appear you are doing just that. To put it another way, make sure it doesn’t look like your ship is sinking.
Payments
Ensure payments and balances are reflected properly by paying your personal credit card bills a week before cycle/due date. Sometimes if your due date is close to the end of the month, a payment may not be applied until after monthly reporting to the credit bureaus occurs. You can also call the lenders and ask when they report to the credit bureaus, to know when you need to make your payment by.
The credit lenders make your due date close to their report date, so that they can try to report the highest balance on your account to the credit bureaus. This will make it look like your debt is more inflated than it really is, and lower your credit scores.
By finding out when the accounts are reported, you can sidestep this landmine and keep your debt ratios in check.
Revolving Accounts
Recognize that lendability for business credit, is mostly focused on your open revolving credit accounts, not installment loans or mortgages. Even store credit accounts and “authorized user” accounts can be ignored by lenders, so it is important to have established personal credit accounts of your own. To qualify for $25k-$500k of 0% business funding, you need active open credit accounts on your report.
The amount of time an account has been open is referred to as “seasoning”. It is best that your accounts have at least one year of seasoning. This shows longevity, and the ability to maintain credit over a long period of time. Both personal and business credit lenders like to see long seasoning, to show that you are a responsible credit user.
This report is provided free for your education by Fund&Grow®.
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