Business credit cards carry a lot of benefits.
If you’re new to owning a business, they can be a great way to build your business credit score, which can help you secure financing (like a good long-term loan) in the future. Some of them come with excellent rewards programs, like cash back or points for travel. And, when used responsibly, they can even act as a short-term loan to help you finance your business.
But just as consumers are with personal credit cards, a lot of business owners are under-informed about best practices when it comes to using a business credit card. And, while there are a few key differences between credit cards for business and personal credit cards, the way they work is very similar.
One thing that people often get wrong when it comes to business credit cards is carrying a balance. Many believe that carrying a balance from month to month is good for your credit score—but is it actually?
Lies You’ve Been Told About Carrying a Balance
Business credit scores take into account much of the same criteria as personal credit scores. The main difference, though, is that personal credit records are kept private, while business credit records are public and available to anyone who pays to access them.
Just like a personal credit score, two of the biggest factors in determining your business credit score are your payment history and credit utilization ratio. And in order to have a payment history and a credit utilization ratio in the first place, you need to have credit accounts open—and use them.
Credit bureaus like to see that your credit utilization ratio is under 30%. This means that you should only be using an average of less than 30% of all of your available credit at any given time. If your total credit line is $10,000, you should try to only owe a maximum average of $3,000.
Because credit utilization ratio is so high on the list of important credit-scoring factors, many believe that carrying a balance is helpful in building their credit score, as long as they make their minimum payment each month. In fact, according to a recent Bankrate survey, 51% of consumers believe that carrying a high balance is good for credit health.
Carrying a balance, however, is not the same as utilizing your credit. In fact, it can be quite risky.
After your credit card bill is due, you’ll start owing interest on any amount you didn’t pay by the due date. And depending on your specific business credit card’s terms and conditions, that could be an annual percentage rate (APR) of over 20%. The longer you wait to pay off your balance, the more interest you’ll end up accruing.
Another myth a lot of people believe about carrying a balance is that it helps your credit score because you pay more in interest. If card issuers are making more money off of your interest payments, you’re sure to have a higher score, right?
This couldn’t be further from the truth. While the percentage of credit used does impact your credit score, the amount you’ve spent or the amount credit card issuers make off of you does not make any positive difference. If you end up digging yourself deep into a hole of debt, it will only hurt your business.
Additionally, many believe that their business credit cards won’t affect a personal credit score, which isn’t true. Many business credit cards do report to consumer credit bureaus—and some only report when the information being shared is negative. It’s important to remember that your actions as a business owner may still affect your personal credit history, no matter how diligently you separate your business and personal finances.
Risks of 0% APR Business Credit Cards
When they need to make a big purchase, a lot of business owners turn to a credit card with a 0% APR introductory offer. These cards can be a lifesaver, because they allow you to pay down your debt interest-free for a specified period of time—sometimes even as long as 15 months.
But these special offers come with their own set of risks. For example, as soon as the APR kicks in, your existing debt will start accruing interest, perhaps much faster than you’d expect. Business credit cards with the lowest interest rates still typically charge at least 12%. If you’re not careful about paying off your balance before the APR kicks in, you could end up paying much more than you bargained for.
How To Best Use Your Business Credit Card
As you’ve probably gathered, using a business credit card is kind of a catch-22: you need to use it in order to build your credit history and gain more business opportunities in the future, but using it too much and not paying off your debts could be incredibly damaging for your business.
While a business credit card can be great for building business credit (particularly for new business owners who may not be able to receive other forms of business financing), you have to be careful not to use it so much that you end up deeply in debt. Luckily, there are a few best practices to always keep in mind that will help you avoid this.
For one thing, never use your business credit card for personal expenses—or your personal credit card for business expenses. You need to keep these separate for tax purposes, and starting as early as possible can save you many major headaches down the line.
When starting off, only charge necessities to your business credit card—the purchases you’d have to be making, anyway. This will help you avoid taking on too much debt, because you’re only using the card to pay for things you already know you can afford.
Remember to closely monitor the interest rate on your card. It may change more often than you think, and you should regularly work any interest rate increases into your budget.
Finally, the best thing you can do to maintain good standing with your business credit card company, credit bureaus, and your own business finances is to pay your business credit card off in full each month. With regular usage and paying off your debts, your business credit score will only grow over time—and you don’t need to keep a running balance in order for that to happen.