Understanding the Impact of Credit History on Merchant Account Approval

As a business owner, your journey is filled with unique challenges. One of those hurdles could be securing a merchant account if your personal credit history isn't where you'd like it to be. So, how much does your credit score matter when applying for a merchant account? And, if it’s less than ideal, is there a way forward?

This guide will walk you through how personal credit history affects merchant account applications and explore solutions for business owners with less-than-perfect credit scores.

Does Personal Credit History Matter When Applying for a Merchant Account?

The short answer is yes—your personal credit does play a role in whether your application is approved. Merchant account providers consider your credit score to evaluate potential risk, but it’s not weighed as heavily as it would be in, say, a traditional loan application. While your credit score is a key factor, it’s only part of a broader evaluation.

But why does personal credit matter for merchant accounts? Well, a merchant account functions somewhat like a line of credit. When a customer purchases with a credit card, the funds are credited to your account before the bank receives payment from the customer’s card-issuing bank. If the customer disputes the charge or returns the product, the merchant account provider is responsible for covering those costs initially. This makes your creditworthiness a crucial consideration for the provider.

How Good Does Your Credit Score Need to Be?

Generally, if your credit score is above 600 or 630, you have a good chance of getting approved for a merchant account. There isn’t a universal benchmark, as each provider has its own criteria and tolerance levels. But the good news is that you don’t need to have perfect credit. Average or fair credit is often acceptable.

It’s important to remember that your credit score is just one factor out of many. Providers will also assess other variables, such as:

• Chargeback and decline rates
• Industry type
• Bank statements
• Sales volume projections
• Time in business
• Tax liens or active collections
• Lack of credit history

A lower credit score doesn’t automatically mean rejection. Similarly, an excellent credit score doesn’t guarantee approval. So, even if your credit isn’t stellar, you might still secure a merchant account if other aspects of your business are solid.

Will a Low Credit Score Affect Your Processing Rates and Fees?

Surprisingly, your personal credit score won’t directly impact your credit card processing rates and fees. For instance, two business owners—one with outstanding credit and another with poor credit—could receive the same transaction rates from the same provider.

However, a lower credit score may affect the structure of your account. For example, the provider might impose conditions such as a rolling reserve or an ACH delay. While this won’t alter the transaction rates, it could influence how and when you access your funds, potentially affecting your cash flow.

How Your Credit History Influences Your Application

During the merchant account application process, your personal credit can impact your application in one of three ways:

1. Declined Application: If your credit is very poor, the application may be outright declined.
2. Conditional Approval: If your credit is marginal, you may be approved under conditions like rolling reserves or ACH delays.
3. Approved Application: If your credit is good, you’ll likely be approved without special conditions.

Once you’re approved, the account is monitored based on your processing activity rather than your credit score.

How to Get a Merchant Account with Bad Credit

Bad credit doesn’t mean you’re out of options. Here’s how you can increase your chances of approval:

1. Use a Co-Signer: One of the most popular ways to overcome credit issues is by using a co-signer. If a friend or family member with a stronger credit score agrees to sign the application, it could increase your chances of approval. Just ensure they understand their responsibility, as they’ll be liable for any debts incurred on the account.
2. Accept Conditions: Consider agreeing to a rolling reserve or ACH delay. While not ideal, these conditions can be temporary. Once you establish a good track record, you can negotiate for better terms.
3. Provide Documentation: Sometimes, bad credit is the result of unfortunate but understandable situations, such as identity theft or an overlooked utility bill. Providing documentation to explain these circumstances can help sway the underwriter’s decision.
4. Consider High-Risk Processors: There are merchant account providers who specialise in working with high-risk businesses or those with bad credit. While the fees might be higher, they are more flexible with approvals.
5. Use a Third-Party Payment Processor: If securing a traditional merchant account proves too difficult, consider a third-party payment processor like PayPal or Stripe. While these services have higher transaction fees, they usually don’t require a credit check and can get you up and running quickly.

Can Bad Credit Cause You to Lose an Existing Merchant Account?

Once your merchant account is active, your personal credit score isn’t a reason for account decline or termination. Providers will evaluate your account based on your processing history and performance. However, issues like high chargeback rates, excessive fraud, or non-compliance could put your account at risk of closure.

How the Payments Directory® Can Help

Navigating the world of merchant accounts and payment processing with less-than-perfect credit can be overwhelming, but that’s where The Payments Directory® steps in to support business owners like you. The Payments Directory® connects you with reputable merchant service providers who specialise in working with businesses facing credit challenges. It provides a centralised platform to compare options, read reviews, and identify providers that offer flexible terms tailored to your unique circumstances. Whether you’re seeking high-risk processors or third-party payment facilitators, or just need advice, The Payments Directory® acts as your trusted partner, guiding you every step of the way to ensure you find the right fit for your business.

Your Path Forward

Your credit history is certainly a consideration in merchant account applications, but it’s not the only factor, nor is it necessarily the most significant one. A lower credit score doesn’t automatically disqualify you from accepting card payments. Be upfront with processors about your credit situation, consider using a co-signer, or be open to temporary conditions that will help you establish credibility.

Your journey as a business owner is unique, and there are always options to overcome credit challenges. With the right approach, you’ll find a solution that fits your business needs.