How to Improve Your Credit Score Before You Apply for a Loan
Whether you’re applying for your first small business loan or gearing up for a major expansion, your credit score can make or break your approval. For many entrepreneurs, that three-digit number is a source of stress, especially if they’ve been turned down in the past or don’t fully understand what lenders are looking for.
“It’s not just about the score — it’s about understanding how that score is built and what impacts it,” says Ebony Cochran, credit restoration expert and founder of The Debt Survivor and Blackwood Credit Services, who sits on Michigan Women Forward’s loan committee. “I’ve seen people miss out on funding because of simple credit mistakes that could’ve been avoided.”
To help entrepreneurs position themselves for loan success, Cochran breaks down what actually affects your credit score — and how to improve it before you apply.
1. Know What Score You’re Looking At
Before you make any moves, Cochran says it’s essential to understand what kind of credit score you’re viewing. “A lot of people look at Credit Karma and say, ‘I have a 700,’ but then apply for a loan and hear, ‘Sorry, you’re at 626.’ That’s because they’re using two different models.”
All lenders use your FICO score, while many free tools like Credit Karma use the VantageScore model. The numbers aren’t interchangeable.
What to do:
- Use Credit Karma or similar apps to monitor your credit report, but don’t rely on the score.
- When preparing to apply for a loan, pull your actual FICO score to know where you stand.
- Visit annualcreditreport.com for free weekly credit reports from all three major bureaus — but remember, these don’t include your score unless you pay extra.
2. Understand the 5 Key Components of Your Score
Once you know your score, it helps to understand what affects it. According to Cochran, FICO scores are built from five main factors:
- 35%: Payment History — Late payments are the No. 1 score-killer. “Three late payments on one account can drop your score as much as a bankruptcy does,” Cochran warns.
- 30%: Credit Utilization — This refers to how much of your available credit you’re using on revolving accounts like credit cards. “Maxed-out cards hurt your score month after month,” she says.
- 15%: Credit History Length — The longer your accounts have been open, the better. This is why becoming an authorized user on someone else’s older account can be a smart move.
- 10%: New Credit — This takes into account the new accounts you open, but keep in mind that every time someone pulls your credit, your score can dip slightly and cause a hard inquiry on your report.
- 10%: Credit Mix — Having a variety of credit types (credit cards, auto loans, etc.) helps, but only when they’re managed well.
3. Use Strategic Fixes for a Quick Score Boost
If you’re preparing to apply for a loan in the next 30 to 90 days, some targeted actions can give your score a lift:
- Reduce your credit card balances as much as possible, especially those near their limits.
- Ask for a late payment to be removed. Cochran recommends calling your creditor and requesting a “courtesy adjustment” if you have a strong payment history.
- Become an authorized user on a trusted person’s older, well-managed account. “It’s not co-signing. You don’t even need the card — you just need the account to show up on your report,” she says.
- Send professional appeals directly to decision-makers at major credit companies.
4. Avoid These Common Credit Mistakes
Cochran sees clients unintentionally hurt their credit all the time by following bad advice. Some of the most frequent missteps include:
- Paying collections instead of reducing revolving debt. Collections are usually old and only impacted your score once. “Paying down a maxed-out card can boost your score far more,” she explains.
- Disputing errors online. It may seem convenient, but “clicking that box waives many of your consumer rights,” she warns. Dispute errors by mail so you have a paper trail.
- Filing bankruptcy too quickly. Cochran has seen people file for as little as $3,000 in debt. “Bankruptcy stays on your report for 7 to 10 years. Often, there’s another way.”
5. Don’t Let Hard Inquiries Pile Up
Every time a lender checks your credit, it creates a “hard inquiry,” which drops your score slightly. That’s why shopping around without a plan can be risky.
“I had a client who went to a dealership and ended up with 27 inquiries for a car loan she never got,” Cochran says. “It tanked her score.”
What to do:
Pull your credit report first and clean it up before applying for loans or credit cards. That way, you’re only applying when you have a real shot at approval.
6. Check Your Report and Your Budget Monthly
Credit scores are often a reflection of financial habits. “If you don’t have a budget, your credit will suffer,” Cochran says. She recommends reviewing your credit report and personal finances at least once a month. Even free tools like Credit Karma can be helpful for spotting errors or fraud — just don’t focus on the score alone.
7. Build Credit the Smart Way
If you have a thin credit file, Cochran says the solution isn’t to open a bunch of new accounts. “It’s better to have a few well-managed accounts than 20 new ones,” she explains. In fact, too many accounts can dilute your average credit history length and hurt your score.
How Michigan Women Forward Can Help
MWF doesn’t expect perfection, but we do want to set you up for success. If your credit isn’t where it needs to be yet, there are options.
- Connect with a Business Development Officer to review your financial picture before applying.
- Reach out to experts like Cochran, Operation HOPE – Accelerating Financial Opportunity for All or GreenPath Financial Wellness, or other credit restoration services for help managing and improving your score.
- Find out if you qualify for an MWF small business loan by filling out a simple pre-qualifying form.
As Cochran says, “Your credit doesn’t define you, but it does open doors. Let’s get yours unlocked.”
