Understanding the Difference: Personal Credit Scores vs. Commercial Credit Scores

There are two types of credit scores:

Personal credit scores typically range from 300 to 900 and are used to evaluate an individual's creditworthiness. They help predict the likelihood of a person repaying borrowed money on time. A higher score suggests that the borrower is more likely to repay on schedule.

Commercial credit scores generally range from 300 to 1400 and are used to assess the creditworthiness of businesses. These scores specifically predict two key events within the next 12 to 24 months:

1. The likelihood that a business will default on payments to suppliers or lenders.

2. The likelihood that a business will fail.

A higher commercial credit score indicates a lower probability of these events occurring in the future.

Key Factors Influencing Your Personal Credit Score

1. Payment History: This factor reflects your record of on-time and late payments across all credit accounts reported to the credit bureau. Late or missed payments can lower your score, while a consistent history of on-time payments can improve it. Larger and more frequent missed payments, especially recent ones, can have a more significant negative impact.

2. Credit Utilization: This factor applies to revolving accounts like credit cards and lines of credit. The higher the balance reported compared to your available credit limit, the greater the potential impact on your score, though the effect is not always proportional. According to Kuzmic, “credit utilization is a key factor in credit score calculations because there’s a statistical correlation between higher utilization and missed payments.”

3. Credit Mix: This refers to the different types of credit accounts reported to the credit bureau, such as credit cards, car loans, and mortgages. Having a variety of credit types can be beneficial. A lack of diversity in account types, or an excessive number of accounts, may negatively affect your score.

4. Length of Credit History: This factor considers the age of your credit accounts. Those with longer credit histories tend to have higher scores, as a longer history provides a more comprehensive view of borrowing and repayment habits.

5. Credit Inquiries: A credit inquiry occurs when someone checks your credit report. Only “hard inquiries,” typically linked to applications for new credit, impact your score. Too many hard inquiries within a short period can hurt your score, though the effect depends on the situation. For example, applying for five credit cards in a short time could significantly affect your score, while applying for multiple mortgages may have a minimal impact, as it’s considered one shopping event.

   
   

Key Factors Influencing Commercial Credit Scores

1. Payment History: Like personal credit scores, commercial credit scores benefit from timely payments on loans, supplier accounts, lines of credit, and credit cards.

2. Length of Credit History: A longer credit history and extended business operations generally contribute to a higher commercial credit score.

3. Industry: Certain industries are considered riskier, which can lower a business’s credit score.

4. Credit Inquiries: Although credit inquiries do factor into commercial credit scores, they are generally less impactful than on personal scores. According to Josh Farrington, Senior Commercial Consultant at Equifax Canada, these inquiries are weighted less heavily.

Source: bdc

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