In the world of commercial lending, credit scores play a crucial role in determining a borrower’s eligibility and terms for business loans. However, there are many misconceptions about how credit scores work and what truly impacts them. As a commercial loan broker, understanding the difference between myths and facts about credit scores is essential to guide your clients effectively. Here are some common myths and the facts every broker should know.Scrabble Tiles
Myth 1: Checking Your Credit Lowers Your Score
Fact: One of the most pervasive myths is that checking your credit score will lower it. The truth is, there are two types of credit checks: hard inquiries and soft inquiries. Soft inquiries, which occur when you check your own credit or when lenders pre-approve you for offers, do not affect your score. Hard inquiries, on the other hand, occur when you apply for new credit, such as small business loans, and can have a minor impact. However, the effect is usually small and temporary.
Myth 2: Closing Old Accounts Improves Your Credit Score
Fact: While it may seem logical to close old, unused credit accounts to simplify your finances, doing so can actually harm your credit score. Credit history length is an important factor in credit scoring. Closing old accounts shortens your credit history, which can lower your score. Additionally, closing accounts can increase your credit utilization ratio, the percentage of available credit you’re using, which can negatively impact your score. As a commercial loan broker, advise your clients to keep old accounts open, especially if they have a long and positive payment history.
Myth 3: Paying Off Debt Immediately Boosts Your Credit Score
Fact: While paying off debt is always a good financial move, it doesn’t guarantee an immediate boost to your credit score. The timing of credit score updates depends on when creditors report the new balance to credit bureaus, which typically happens once a month. Additionally, your credit score reflects various factors, including payment history, credit utilization, and account age. As a broker, it’s important to manage expectations and remind clients that building or improving credit takes time, even after paying off significant debt.
Myth 4: Only Credit Card Debt Affects Your Credit Score
Fact: Many people believe that only credit card debt affects their credit score. However, all forms of debt, including mortgages, car loans, and business loans, impact credit scores. Lenders assess overall debt management, so it’s crucial to maintain a positive payment history across all types of credit accounts.
Final Thoughts
Understanding the facts about credit scores is vital for commercial loan brokers assisting clients in securing business loans. By debunking common myths and providing accurate information, you can help your clients make informed decisions that positively impact their credit profiles and improve their chances of securing favorable loan terms.
Let Your Business Thrive with Flexible Financing Solutions from PRM Capital
Explore tailored options with PRM Capital like Non QM DSCR loans, unsecured small business loans, and equipment financing solutions. Empower your business with the right financial tools today. Contact us now to learn more.
