It’s important for business owners to establish good credit for their business. Having a strong business credit score will not just help you to receive for a loan with the best terms possible, it can also allow you to receive lower insurance premiums, open a merchant account and receive more flexible payment terms from your suppliers.
As you strive to build and maintain your company’s credit score, the last thing you need to have are your credit cards dragging it down. Here are four ways that your credit card could be hurting your business credit score, and how to prevent them.
1. Closing Your Business Credit Cards
When your business credit cards are open and in good standing, they add to your business credit history and help build your business credit score. But if your business has a limited credit history, closing a credit card can hurt its credit score. When you close a business credit card account, you reduce your credit extended and can increase your debt usage ratio. To avoid this, try to keep your credit card accounts open and in good standing, especially if you have a young company. If you want to close an account because the annual fee is too high, you can always call the issuer and ask to have the card changed to a product without an annual fee (or one with a lower fee), while retaining your account. There may not be a no-annual-fee alternative, but it doesn’t hurt to inquire about your options.
2. High Credit Card Balances
Not only are business credit cards a secure and convenient method of payment, they can offer your company a vital means of financing and help you control your cash flow. But when your credit card balance grows too large, it can impact your business credit score, depending on the credit scoring model. To avoid this problem, try to keep your business credit card balances low, and open new lines of credit if you find you’re charging enough to warrant a new account. For example, you can apply for credit from your suppliers, rather than rely on your business credit cards to carry the burden. Or open a business line of credit for times of the year when you know you’ll have high balances.
3. Late Payments
Even small business owners can have trouble keeping up with a vast amount of bills and invoices each month, so it’s possible that one of your credit card statements may occasionally slip through the cracks. Nevertheless, it’s crucial that you make your credit card payments on time, in order to preserve your business’s strong credit score. Payment history is a major factor in most business credit scoring models. To avoid late payments, you can enable automatic payments from your card issuer, or from your bank account. Also, most credit card issuers offer email and text alerts when a new statement is generated and when a payment is due.
4. New Applications for Credit Cards
When you apply for a new business credit card, it will create a new inquiry that may appear on your business credit report. Some business credit scoring models don’t consider inquiries at all. But for others it may be a factor; in particular with those scoring models that incorporate the owner’s personal credit information/scores with that of the company. For example, an Experian Small Business Report will list all inquiries in the past seven months. By itself, a single new credit inquiry is unlikely to cause any significant changes to your credit score. And not all business credit scoring models will penalize you for multiple inquiries. But some may, and some lenders look see a number of recent inquiries as risky. To prevent your business credit score from falling, limit your new business credit card applications to cards you really want and are likely to qualify for.
How Your Business Credit Cards Help Your Score
Despite these potential drawbacks, credit cards can help your business credit score. For example, having a line of credit with a record of on-time bill payments continues to add positive information to your credit report each month.
Business credit cards can be a valuable way to establish and maintain your business credit score, but only when managed effectively. By using your business credit cards wisely, you can leverage your business credit score to help grow your company. You can see your personal and business credit scores for free on Nav to see how your business credit cards are impacting you already.
This article was originally written on August 4, 2017 and updated on January 27, 2021.