When you open the right business credit card, it can come with some pretty great perks for you and your company to enjoy. For starters, business credit cards can simplify accounting and help you to keep business and personal expenses separate. They can offer you protection from fraud. With a business credit card, you may be able to earn cash back or other valuable rewards which can help stretch your company dollars ever farther. And, of course, perhaps the biggest perk which your business credit card may offer is the chance to help your company establish good credit reports and scores.
However, there’s a catch. A business credit card also comes with risks. If you don’t manage your business credit card correctly, the account could do you more harm than good.
If you want to avoid risk and get the most out of your business credit card accounts, the following best practices are a smart place to start.
Managing Your Business Credit Card Accounts
Pay on Time or, Better Yet, Early
The number one rule of sound business credit card management is to make your payment on time, every single time. In fact, paying before the due date might even give your business credit scores an additional boost with certain scoring models.
When you pay your business credit card payment late, you’re taking a dangerous risk. Here are a few of the negative consequences you might face if you fail to pay your business credit card on time.
- Late payments on your business credit reports
- Business credit score damage
- Late payments on your personal credit reports (if the business card is reported to the consumer credit reporting agencies)
- Personal credit score damage
- Late fees and penalties
- Account closure
Keep Personal Expenses Off of Your Business Account
Have you ever heard the saying, “don’t mix business with pleasure?” The message is definitely true when it comes to managing your business credit card account.
Many of your business expenses are tax-deductible. Your personal expenses, on the other hand, typically are not. When you use your business credit cards for personal purchases, you can complicate matters for your accounting team. (If you’re a sole proprietorship or small business, that might mean you personally.) Plus, if you use your business card for personal expenses without recording them properly in your business ledger, you could be in serious trouble if the IRS ever audits your company books.
Another reason why it’s important to keep your business credit card free of personal purchases is due to card issuer policy. Most card issuers require you to agree to use your business credit card for business purchases only. If you look back over your credit card agreement, you’ll probably find a statement which goes something along the lines of this.
“Cardholder agrees that this business account is intended to be used solely for business purposes and not personal or household purposes.”
You might get by with the occasional slip up, but if you are regularly using your business credit card to cover personal purchases, it could come back to bite you.
Don’t Revolve a Balance
Whether you are managing a business credit card or a personal credit card, best practices dictate that you should pay your balance off in full every month. Here are a few reasons why you need to create the habit of paying your account balance down to $0 each billing cycle.
Carrying a balance is expensive.
Credit card accounts are notorious for having high interest rates. When you carry a balance from one month to the next on a credit card (business or otherwise), you’re most likely going to waste money on interest fees.
You might damage your personal credit scores.
Some business credit cards may appear on your personal credit reports. When this occurs, the balance on your business credit card will be factored into your personal revolving utilization ratios. Higher revolving utilization ratios (caused by high debt-to-limit figures on your credit reports) may cause your credit scores to drop.
You might damage your business credit scores.
Many business credit scores will not be impacted negatively when you carry outstanding credit card balances or have high utilization ratios on your business credit cards. Business credit scoring models like Dun & Bradstreet’s Paydex Score, for example, focus on your payment history instead.
Yet that isn’t true of every business credit score. With a few scoring models, not paying off your business credit cards in full each month could damage your scores. Although the risk of damaging your business credit scores with a high revolving utilization ratio is low, it’s still a risk you can avoid altogether if you create the habit of paying your business credit card balances off in full each billing cycle.
Want to learn more about debt utilization and your credit scores? Check out this helpful article from Nav.
Review Your Statements for Mistakes
As a busy business owner, you may feel like reviewing your monthly credit card statement for mistakes is the last thing you have time to do. Yet in reality, skipping your monthly statement review is a shortcut you can’t afford to take.
Credit card fraud is common, even on business accounts. If your business credit card is used without your permission, you could be left footing the bill for unauthorized transactions unless you report the fraud to your card issuer promptly.
Remember, a well-managed business credit card can simplify your life and offer some pretty fantastic perks at the same time. Just keep in mind that your business credit card is only a tool. It’s ultimately up to you to determine how you will use it.
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