Is Your Business Credit Utilization Too High? Here’s How to Fix It and Improve Your Score

Hey Detroit business owners,

If you’ve been checking your business credit score lately, and it’s not where you want it to be, the problem could be more common than you think — high credit utilization. In simple terms, this is when your business is using a large portion of its available credit, and it can hurt your credit score big time.

But don’t stress! High business credit utilization is something that can be fixed, and with a little effort, you can get back on track quickly. If you’re ready to take control of your business credit, let’s break down how to fix this issue and improve your credit score along the way. Ready to dive in? Let’s go!

What Is Business Credit Utilization and Why Does It Matter?

Before we get into the “how-to” of fixing high credit utilization, let’s first make sure we understand what it actually is. Business credit utilization refers to the percentage of your business’s credit limits that you’re currently using. For example, if you have a credit line of $10,000, and you’ve used $7,000, your credit utilization rate is 70%.

Why does this matter? Credit bureaus consider credit utilization one of the most important factors in your business credit score. A high utilization rate (typically over 30%) can signal to lenders that your business might be relying too heavily on borrowed money. This increases your
perceived risk as a borrower and can lower your credit score.

In Detroit’s competitive business landscape, a lower credit score means fewer opportunities for business loans, lines of credit, and vendor relationships. So, credit utilization is something you want to keep an eye on.

How High Credit Utilization Hurts Your Business Credit Score

If your business credit utilization is too high, it could be holding your credit score hostage. Let’s explore exactly how this happens:

1. It Signals Financial Instability

A high credit utilization rate tells lenders that your business might be struggling with cash flow or operating with insufficient capital. This makes your business appear more risky to lenders, and they might hesitate to extend credit or offer favorable loan terms.

2. It Increases Your Risk of Default

When you’re using a large portion of your available credit, there’s a higher chance of missing payments. Late or missed payments can drop your credit score even further, creating a vicious cycle that can be tough to break.

3. Higher Interest Rates

If you do get approved for a business loan or line of credit with high credit utilization, you’ll likely face higher interest rates. Lenders view high credit utilization as a sign that you might be struggling to manage debt, so they’ll charge more to cover their risk.

Step 1: Check Your Current Credit Utilization Rate

Before you can fix the issue, you need to know where you stand. The first step is to assess your business credit utilization rate. Here’s how you can do that:

What You Need to Do:

• Check your credit report: Get a copy of your business credit report from the major bureaus like Experian, Equifax, and Dun & Bradstreet. Make sure to check your current credit limits and balances for each credit account.
• Calculate your utilization rate: Use this simple formula:

Credit Utilization Rate=Total Credit Used Total Credit Limit×100text{Credit Utilization Rate} =
frac{text{Total Credit Used}}{text{Total Credit Limit}} Times
100 Credit Utilization Rate=Total Credit Limit Total Credit Used×100

For example, if you have a total credit limit of $15,000 across multiple credit accounts, and you’ve used $9,000, your credit utilization rate is:

9,00015,000×100=60%frac{9,000}{15,000} Ɵmes 100 = 60%15,0009,000×100=60%

If you’re using more than 30% of your available credit, it’s time to take action to lower that number and improve your credit score.

Step 2: Reduce Your Credit Utilization Rate

Now that you know where you stand, it’s time to take action and lower your credit utilization rate. Here are the most effective ways to do this:

What You Need to Do:

• Pay down existing debt: The most straightforward way to lower your credit utilization rate is to pay off some of your existing credit card or loan balances. Start with the highest-interest accounts to reduce your overall debt.
• Increase your credit limits: If you’re unable to pay off your debts quickly, consider requesting a credit limit increase from your creditors. If they approve it, your credit utilization rate will go down, even if your balances stay the same. But be careful here — only request a limit increase if you’re confident you won’t rack up more debt.
• Avoid new credit purchases: As you work on lowering your credit utilization, avoid making new purchases on your business credit cards or lines of credit. Focus on paying down existing debt to improve your utilization rate first.

By lowering your credit utilization, you’re demonstrating financial responsibility to lenders and improving your chances of rebuilding your credit.

Step 3: Keep Your Credit Balances Low Going Forward

Once you’ve reduced your credit utilization rate, the next step is to maintain a low utilization rate over time. Keeping your credit balances low shows lenders that you’re financially responsible and capable of handling debt without overextending yourself.

What You Need to Do:

• Pay off balances in full each month: The easiest way to keep your credit utilization low is by paying off your credit balances in full each month. If you can, avoid carrying a
  balance from month to month.
• Monitor your credit regularly: Keep an eye on your credit utilization to make sure it doesn’t creep back up. Use free tools like Credit Karma or Nav to track your business
  credit score and credit utilization rate.
• Use your credit responsibly: Use business credit strategically for purchases that will help your business grow — things like marketing, inventory, or equipment — but always aim to pay off the balance quickly.

Step 4: Rebuild Your Business Credit with Positive Activity

After lowering your credit utilization, the next step is to start building positive credit history. This will help increase your business credit score and improve your financial standing with lenders.

What You Need to Do:

• Use credit wisely: Don’t be afraid to use credit, but do so responsibly. Small, manageable purchases that you can pay off each month will show lenders that you can handle credit responsibly.
• Consider a secured credit card: If you’re having trouble qualifying for traditional business credit cards, consider applying for a secured business credit card. These cards
  require a deposit but can help rebuild your credit history when used responsibly.
• Set up automatic payments: To avoid missing payments in the future, set up automatic payments for all your business credit accounts. This ensures you always make timely payments, which is essential for rebuilding your credit.

Step 5: Work with a Credit Counselor if Needed

If you’re still struggling with your credit utilization rate or business debt, it might be time to seek professional help.

Credit counseling can provide expert guidance on how to manage your credit, debt, and finances.

What You Need to Do:

• Consult a credit counselor: Reach out to a certified credit counselor who can help you create a plan for lowering your credit utilization and improving your business credit.
• Consider debt consolidation: If you have multiple high-interest debts, a debt consolidation loan might help you combine them into one manageable payment.

Final Thoughts: Lowering Your Credit Utilization Is Key to Rebuilding Your Business Credit

If your business credit utilization is too high, it’s time to take action. With a little effort and discipline, you can lower your utilization rate, improve your business credit score, and open the door to better financing options.

Remember, it’s not just about paying down debt — it’s about using credit responsibly and building a strong financial foundation for the future of your business. In Detroit’s competitive market, your credit score can be the key to securing loans, lines of credit, and new opportunities. So, take control of your credit utilization today, and start positioning your business for growth.

If you need any help with your business credit or finances, Archusphere Inc. is here to support you every step of the way. Together, we’ll get your business back on track!