If you have been rejected multiple times when you have applied for merchant account, or if you recently had your account terminated right after it was approved, then you must be wondering, how does the personal credit score affect the merchant account approval and the stability? You may also have another question that why do payment service providers really care about your credit score? The short answer is that payment processors, they basically view a low credit score as a risk indicator for chargebacks, potential losses, and fraud. Let us quickly explain you everything that you must know about the relationship between your credit score and the merchant account, and what you should do if you have been denied by payment service providers.
Why Do Payment Service Providers Check Your Credit Score?
Whenever you apply for a merchant account or a payment gateway, the payment processing institution, they conduct an underwriting assessment to check your risk profile. While doing this, your personal and business credit scores are also evaluated.
The credit scores matters because of multiple risk factors. Let us understand all of these one by one.
- Advance funding model. When your customer pays you with a credit card, then the payment service provider sends you the money up front, and this is done before collecting the funds from the customer’s bank. You know that the credit card which the customer is using to make purchase on your website has got a payment due date, which is generally a month later.
- Liability exposure. Think about it. If there is a problem at a later stage, such as fraud, chargeback, refund, or business closure, then it is the payment service provider or the payment processor that must cover the loss.
- Low credit is basically an indication of high risk. When you or your company has low credit score, then it definitely signals high risk for missed payments, excessive chargeback, and business instability.
- Industry statistics. There are certain industries where merchants that have poor credit history have shown higher chargebacks and account failures. When a payment service provider reviews your application, they consider all of the above factors plus many more, and this is just done to ensure that if they approve your account, it stays active for a long time. And that is why it is important for you to take your credit score seriously.
How Credit Score Can Impact Your Merchant Account Approval.
The following table gives you a tentative idea about the credit score range and the approval likelihood. However, it is important to know that the actual parameters are set by the payment processing companies’ internal team and various regulations and rules which they are supposed to follow as per the government and card companies.
| Credit Score Range & Classification | Approval Likelihood & Typical Terms |
|---|---|
| 720+ (Excellent) | Very High Best rates, no reserves, fast approval |
| 680–719 (Good) | High Competitive rates, standard terms |
| 640–679 (Fair) | Moderate Standard rates, possible rolling reserve |
| 600–639 (Poor) | Low Higher rates, reserve requirements likely |
| Below 600 (Very Poor) | Very Low High rates, significant reserves, or denial |
The payment processors, they look for the personal credit score, which is typically the FICO score. They also check the business credit score if it is established. For this, they usually check the Dun & Bradstreet DNB database. Another factor which they evaluate is the credit history length. Sometimes they even check the outstanding debts and obligations, bankruptcies, or liens, payment history patterns, and even credit utilization ratio.
So you might find it funny, but basically it’s pretty much similar to the way banks evaluate your profile when you apply for a credit card or business funding or personal loan.
What Happens If Your Credit Is Too Low?
Some merchants may initially receive the approval from the payment processor, and then the merchants process a few transactions, and later they get an email that the merchant account is terminated or the payment gateway is shut down. This usually happens once a deeper underwriting reveals credit issues.
In some cases, merchants may be offered high fees and reserves. Basically, the payment processors may approve you, but with less favorable terms, such as high processing rates, which can range between 3.5% to 5%, instead of the standard 2 to 3% transaction merchant discount rate.
They may also implement a rolling reserve, which is generally between 5% to 10%, or even sometimes 15%. Remember, this money is withheld with the payment processor for a period of at least 90 to 180 days. They may also implement some minimum monthly requirements. Basically, you are required to process a fixed amount of volume each month for the continuation of your account.
The payment processor may ask for setup fees or one-time boarding charges, which generally ranges from $99 to $499.
Do not forget that if you are not in one of those lucky merchant scenarios which we have discussed above, then you may also get outright denial. Many standard low-risk payment processors automatically decline applications when certain credit thresholds are not met, which is generally between 600 to 650 FICO scores.
Merchant Account Options for Low Credit Scores
- The first option is to approach a high-risk merchant account provider. These are specialized payment service providers work with merchants who do not have excellent credit score, or businesses that operate in industries which have elevated risk in comparison to standard businesses. Such PSPs have their minimum credit score requirements, and this usually starts with at least 500 plus. Some even require minimum 550 plus FICO score. Such accounts are usually suitable for merchants operating in high-risk sectors, or those operating in international markets. Generally, businesses operating in industries such as CBD, vape, credit repair, iGaming, skill competition, online dating, nutraceuticals, herbal, they prefer high-risk merchant account providers.
- Another option is working with payment service providers that offer aggregated solutions. Sometimes such solutions do not conduct a comprehensive analysis during the sign-up, because most of such accounts are established within minutes. But it is important for you to know that such quick setup accounts may also be terminated at a faster pace if the provider realizes the risk factor. The benefits are that in most cases such accounts are activated with no credit check for initial approval. These accounts are fast to set up and they do not have any monthly fees. However, the challenge is that such accounts are usually suspended without any warning and the funds are frozen for 90 to 180 days. Basically, such accounts have got less stability than dedicated merchant accounts.
- Another option which business owners that have low credit score can approach are the alternative payment methods, and these include ACH bank transfer, check payments, payment link, cash or wire transfer options, as well as cryptocurrency payment solutions.
How You Can Improve Your Merchant Account Approval Chances.
You can start with short-term strategies, and this includes applying with a cosigner or a guarantor. Some payment processors allow business partners or owners with better credit score to guarantee the account.
You can also try to offer larger reserves. Voluntarily tell the payment service provider that you are absolutely okay with rolling reserves between 10 to 15 percent, so that it can help offset the credit concerns.
Also, you should start with lower processing limit. Request a conservative monthly limit initially, and then increase and build your processing history. Make sure that you always inform the payment processor about increase in sales forecasting.
Make sure you provide strong business documentation. This includes bank statement that show healthy cash flow, provide the required business financials, that is, that includes the profit and loss statements and balance sheet.
Do not hide any references that you may provide from respectable vendors and suppliers. Sometimes providing proof of industry experience may also motivate underwriters to look at your application in a positive way.
Use alternative payment methods first and do not only rely on credit and debit card processing. You can easily build your transaction history by using ACH or e-check or other payment method, and then apply for credit card processing account after three to six months.
At QuadraPay, we help merchants that are struggling to get payment gateways and merchant accounts because of bad or low credit scores in the US, UK, Europe, Australia, and New Zealand. Explore this dedicated Bad Credit Merchant Account page for more information. If you need immediate assistance, feel free to apply today with QuadraPay, and one of our experts will help you.