If you have had bad experiences with credit cards before, then you might try to avoid them completely. That’s fine for people who have serious spending problems.
If you’re trying to build a good financial reputation for your business, though, a credit card can do wonders. You just have to use it responsibly.
Building Credit With Credit Cards
It’s rather easy to build a solid financial reputation for your business when you follow a few credit card rules:
- Try to pay off your balance every month
- Never make the minimum payment
- Never make late payments
- Maintain a healthy balance to limit ratio
Pay Off Your Credit Card Balance Monthly
If possible, you should pay off your credit card balance when the bill comes. If you don’t, then you’ll end up spending more money on the items you buy. Plus, paying interest will not help your business build a good credit history faster. You’re just losing money without getting anything in return.
Paying off the full balance isn’t always possible (some months are rougher than others). If you can’t pay off the full amount, do what you can to keep your balance as low as possible.
Never Make Your Credit Card’s Minimum Payment
With a high enough credit card balance, minimum payments could literally mean that you owe money for the rest of your life. Even a rather small $1,000 can take years to eliminate when you only pay the minimum. Always pay more than the minimum, even if you can only afford a few dollars more.
Every dollar that you spend now will help you save much more money down the road.
Always Pay Your Credit Cards on Time
Late credit card payments will kill your business’s PAYDEX® score. Your payment history accounts for 35 percent of your credit score. Even a few days can look bad to potential lenders and business partners. Plus, late payments give credit card companies an excuse to raise your interest rates, which is never a good thing.
As long as you pay on time, though, you can improve your credit score by showing that you are responsible. That could mean a much lower interest rate when you apply for a business loan. It also looks good to investors and business partners that will pick through every part of your company before taking any risks.
Maintain a Healthy Balance to Limit Ratio
The smaller your balance, the better. Realistically, though, most businesses carry some credit card debt from month to month. The key is to let it help you rather than hurt you. As long as your balance is less than 25 percent of your credit card limit, you’re doing a pretty good job. Still, the smaller the balance, the better it looks.
To make sure you’re within a healthy limit, multiply your credit card’s limit by .25. If you’re balance is higher than that number, you need to get it lower soon, so your credit report will look better.
Credit cards have destroyed some businesses. If you keep things in perspective and follow a few rules, though, they can do wonders for building your business’s financial reputation.