Securing a credit card for your business can be a great way to build up your credit score. Being a responsible card user can open up other financing opportunities for you down the road.
That being said, with great power comes great responsibility. Opening up a credit card can cause more harm than good if you’re not managing the card well.
Let’s take a look at the six biggest mistakes business owners make with their credit cards, and how you can avoid them.
1. Maxing Out Your Card
When you open a business credit card, there is a set monthly spending limit. While this may seem like a green light to spend that amount of money each month, maxing out your card can actually harm your credit score.
Your credit card utilization rate is a key component in determining your credit score, and it’s calculated by looking at your monthly spending as compared to your monthly credit limit—this could be just one card or across multiple sources of credit.
If you’re consistently charging more than 30% of your total credit limit, you’re exceeding the ideal utilization rate and causing damage to your credit score, even if you’re paying off your balance in full each month.
2. Only Making Minimum Payments
When you only make minimum payments on your credit card, you’re doing two things: First, you’re increasing the amount of interest you’re paying each month (unless you have a 0% Intro APR card and are still within the timeframe of interest-free spending), and second, you’re adding to the amount of time it will take you to pay off your balance.
While paying off your total balance each month is ideal, even if you can only manage to pay half or three-quarters of the bill, it’s better than only paying off the minimum.
3. Missing Payments or Paying Late
Missing a credit card payment has a number of consequences including late fees, interest rate increases, and a potential drop in credit score. In this digital age, there is no excuse for a late credit card payment! Many credit card companies allow you to set up autopay for your bill each month, but if you choose to forego modern technology, circle your payment date in your calendar. Late payments can have real negative consequences, but they are easy to avoid.
4. Not Reviewing Your Billing Statement
While it can be tedious to look through all of your charges for the previous month, it’s important to review your billing statement prior to paying your bill. First and foremost, you want to be sure that there are not any erroneous or fraudulent charges present. But reviewing your statement also makes you more aware of your spending habits and how your costs are adding up.
When you’re paying with plastic, it can be easy to forget how much you’re spending until you see the final tally at the end of the month. Take stock of where you’re spending the most money and then determine if there’s a way to cut costs on those expenses moving forward.
5. Giving Cards to Your Employees
Many business card issuers will allow you to have multiple cards attached to one account. It can be useful to give credit cards to your employees, allowing them to take responsibility for purchasing things they need to get their jobs done, and taking the onus off of you as the sole cardholder.
Think carefully, however, before you hand out cards to your employees. You’d like to believe that everyone is trustworthy, but you don’t want to find yourself in a situation where an employee is using business funds to pay for personal items. This kind of activity puts your business’s finances in jeopardy, so be selective when deciding which of your employees absolutely need a business card and make sure to review their spending.
6. Canceling a Card Prematurely
After you pay off a credit card once and for all, you may be tempted to close out the account. However, closing the account can actually have a negative impact on your credit score—for two major reasons.
First, if you have multiple accounts open, your credit utilization ratio will likely go up. Consider this; if you close out that account, you will decrease your total available credit limit, however, if you have other accounts open, your monthly spending might not necessarily go down. Therefore, you’re credit utilization ratio could be put at risk.
Second, if this is an older account, you might be decreasing the average age of your credit accounts, which will ding your credit.
It’s better to be safe than sorry—keep the account open, even after you pay the balance off. Who knows, you might need to tap this credit again down the line.
Applying for a business credit card is often one of the first steps a business owner can take to build up their credit. Avoiding these common pitfalls that come with credit card ownership will allow you to use your credit card as an asset to your business and create future opportunities for additional financing.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.