As you can see, business credit cards aren’t a one-size-fits-all tool. There are different ways to use credit card loans based on your business’s goals. But some tips for credit card usage apply across the board, no matter what type of credit card you use and how you use the card as a financing vehicle.
Here are some tips when using credit card loans for business:
1. Try to keep a low or zero balance.
Whenever possible, aim to keep a low balance on your credit card, or, even better, pay off the balance in full each month. Balances accrue interest daily, so what starts as a low amount can end up growing bigger and bigger.
Plus, the amount of money you owe to lenders and credit card companies is the second biggest factor after payment history that impacts your credit score. Keeping your balances low will boost your credit score.
Ultimately, you should treat your credit card like you would a loan. Just like you have to make regular installment payments on a loan, you should obligate yourself to paying at least the minimum monthly payment.
2. Choose issuers that report to business and personal credit bureaus.
When opting between a business credit card and consumer credit card, the better choice depends on your goal. If your goal is to get the highest credit limit possible, consider a business credit card. Most issuers grant more spending power on business credit cards.
If your goal is to improve your personal credit score, then you might consider using a consumer credit card. But using a personal credit card for business purposes gets tricky, as it defies the best practice of separating your personal and business finances whenever possible.
Even better? Choose a business credit card issuer that reports card activity to the consumer credit bureaus. At this time, only Capital One business cards appear on personal credit reports. Personal credit is key to qualifying for bank loans, SBA loans, and other top tier business loans, so if that’s your eventual goal, start your search with a Capital One business card.
Of course, keep in mind that if you default on payments, then almost all business credit card issuers will report that negative activity on your personal credit report.
3. Take advantage of cash back and rewards.
Arguably the best part about using a credit card is that you can earn cash back and rewards on purchases. That’s like free money in your pocket, and if you have two or three cards in your arsenal (the average American has three credit cards), you can use the card for each purchase that will yield the highest rewards. Even if you can pay for something with cash or check, consider paying by credit card if you’ll earn rewards on those expenses.
4. Don’t rely on credit cards for everything.
Credit card loans can be a great source of capital, but they aren’t right for everything. For instance, if you want to purchase a piece of equipment for your business, an equipment loan is probably a better way to finance that purchase than your credit card. Using your credit card for something like that wouldn’t be ideal. You’d end up using a large chunk of your credit limit, and would carry a huge balance for a long time.
Similarly, to finance long-term growth, a true business loan like an SBA loan is better. Credit cards can supplement other business loans, but oftentimes, entrepreneurs need multiple types of loan products in their arsenal.