May 28, 2024
Travis Palmer

Personal Credit and What It Means

Personal credit is a crucial aspect of your financial life. It affects your ability to secure loans, credit cards, mortgages, and business funding, and it influences the interest rates you're offered. Having worked in finance for a decade, I've met countless entrepreneurs with “good credit” who were puzzled about being denied funding or receiving smaller amounts. At Approvd, we believe financial literacy is vital for making informed decisions about credit and finance. Let's break down personal credit to help you understand the components that determine your creditworthiness.

Payment History

Payment history is perhaps the most critical factor in personal credit. It reflects how you've managed credit in the past. Since this component makes up a substantial portion of your personal credit score, it's essential to avoid late payments, delinquencies, or defaults. Paying on time builds a positive payment history, making you a more appealing prospect for potential lenders.

Interesting Fact: According to FICO, payment history accounts for 35% of your credit score. Even one missed payment can stay on your credit report for seven years, but its impact lessens over time if you maintain good habits. In the US, approximately 30% of consumers have a credit score below 600, highlighting the importance of timely payments.

Credit Utilization

Credit utilization refers to the ratio of your outstanding credit balances to your credit limits. High utilization suggests you might be relying too much on credit, which is considered risky by lenders. We recommend keeping your credit utilization below 30% to improve your credit profile.

Interesting Fact: Studies show that people with credit scores over 800 tend to use less than 10% of their available credit. In the US, the average credit card utilization rate is around 25%, which is within a healthy range but still close to the 30% threshold.

Credit Diversification

Successfully managing a mix of credit types, such as credit cards, loans, mortgages, and vendor accounts, significantly impacts your personal credit score. A diverse credit portfolio eases lender concerns about your ability to manage multiple credit lines responsibly.

Interesting Fact: Having a variety of credit types makes up about 10% of your FICO score. In the US, about 61% of adults have a credit card, and around 44% have a mortgage, showing a mix of credit types among the population.

Length of Credit History

Creditors favor longer credit histories because they provide more data to analyze an applicant's creditworthiness. Therefore, avoid closing old credit accounts, as this can shorten your credit history and negatively impact your score. New business owners should prioritize establishing trade lines early to start building credit history as soon as possible.

Interesting Fact: The average age of your credit accounts contributes 15% to your FICO score. In the US, the average age of credit accounts is about 14 years, indicating the importance of maintaining long-standing accounts.

New Inquiries

Every time you apply for new credit, a hard inquiry might be made on your credit report, depending on the creditor. Multiple hard inquiries within a short period can hurt your personal credit and may signal desperation to lenders. Be prudent when applying for credit and ask whether the inquiries will be hard or soft.

Additionally, business owners can use Approvd to compare multiple funding options with one application without affecting their credit!

Interesting Fact: Hard inquiries stay on your credit report for two years but typically only impact your score for the first year. In the US, the average consumer has two hard inquiries on their credit report annually.

Public Records and Collections Clearance

Bankruptcies, tax liens, collections, and certain criminal activities severely impact your credit score and limit your access to capital. Resolving these issues promptly should be a top priority. Disclosing such information to potential creditors early on can help avoid wasting time and unnecessary credit inquiries during the underwriting process.

Interesting Fact: A Chapter 7 bankruptcy can stay on your credit report for up to 10 years, while a Chapter 13 bankruptcy remains for seven years. In the US, over 750,000 bankruptcy cases were filed in 2020, highlighting the significant impact on credit profiles.


Understanding personal credit is essential for controlling your financial prospects. By managing your payment history, credit utilization, credit diversification, credit history length, new inquiries, and public records effectively, you can build and maintain a healthy credit profile. Whether you're eyeing a credit card, mortgage, or business loan, strong personal credit opens the door to various lending possibilities. Developing personal credit takes time, so stay disciplined—the benefits are well worth the wait.

About the Author

With over 20 years of experience in the business loan marketplace at Approvd, our expert has helped countless small business owners navigate the complexities of securing the right funding. Passionate about empowering entrepreneurs, our expert combines industry knowledge with a deep understanding of the challenges faced by small businesses today.

Man and woman small business owners

Compare competing offers and get funding for your business today.