To qualify for business loan, lower your personal credit use

A balance transfer may help lower credit utilization

By Elaine Pofeldt

Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question Dear Your Business Credit,
I have a credit card with a balance of $6,000 ($7,000 total credit). To balance my ratio can I apply for another credit card and transfer $3,000? I’m not sure if the other credit card will approve me for more than $3,000. I know it would be the best if they approved me for $6,000, but if they don’t, is this move better for my FICO? I asked for a business loan and they did not approve me because of my high credit ratio. Let me know if this is a good idea to split the money to another credit card to get a balance of less than 40 percent. Thanks. – Gracie

Answer Dear Gracie,
This is a smart question to be asking. As you may know, credit utilization accounts for 30 percent of a consumer’s FICO score. In calculating that score, FICO also looks at the utilization of credit on individual cards.

To help you determine if moving some of your debt to a new card will help you improve your FICO score, I turned to a fellow columnist Barry Paperno, a credit scoring expert with decades of consumer credit industry experience, having been a consumer affairs manager for FICO and consumer operations manager for Experian.

“Any improvement in this reader’s score following the opening of a new card will depend largely on two things: the amount of the credit limit on the new card and whether we’re looking for improvement in the long or short run,” Paperno said in an email.

“While it’s true that having two cards with under 40 percent should be better for the score than one card at over 80 percent, the biggest improvement is more likely to come from the lowering of combined (overall) utilization,” he said. “This is the proportion of total balances to total limits. So, for example, whereas the one card is 86 percent utilized now ($6,000/$7,000), adding a new card with a $3,000 limit would lower the combined utilization to 60 percent ($6,000/$10,000). And with a $6,000 limit, we’re looking at 46 percent ($6,000/$13,000) – a huge improvement over 86 percent.”

The reason it’s important to look at your time horizon is that the immediate effect of opening a new card account is just as likely to be a lower score as a better one, said Paperno. The addition of any new account can both lower your average age of accounts by adding an account with no history and add a hard inquiry at one or more of the credit bureaus, Paperno said.

“Any negative impact should be minimal, however, with much depending on the existing average age of accounts and number of hard inquiries already incurred during the past year,” he added. “Of course, the higher the limit – which helps the score as soon as it appears on [your] credit report – the less negative impact to expect from the new account opening. And regardless of any short term loss of points, the additional available credit will clearly help keep the utilization down over the long term, as the account continues to age and any inquiries stop affecting the score after one year.”

That said, it is important to take a look at how you are using credit in your business, given that you have almost maxed out your first card. Andrew Endicott, co-founder of CreditBridge, a financial technology company focused on expanding access to credit to people without a traditional credit history, points out that it’s not surprising you got turned down for a business loan, given your existing credit utilization of 86 percent. The lower your credit utilization, the better.

While the balance transfer would help your FICO score, it’s important to be brutally honest with yourself about your financial situation at this juncture. I would strongly recommend paying down some of your debt, so it doesn’t become an albatross. Finding another source of income so you can make a real dent in it will give you financial freedom that being in debt takes away. Good luck!

See related: High balance on just one card can hurt credit score, Credit utilization: how this key scoring factor works

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Published: March 21, 2016

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