Getting a new credit card or line of credit can be an exciting opportunity for your business. If used responsibly, it may open doors for funding new equipment, materials, communications, and travel. It also comes with the additional perk of some rewarding cash-back or points programs that help your money stretch a bit further. If not watched carefully, however, using up your available credit can put you in a precarious position—one that can’t always be escaped. See why it’s not wise to push your luck with a fully-charged up line, and some ways to pay for stuff, instead.
You Risk Going Over Limit
The amount of available credit you have on a card is set amount by the bank that’s usually non-negotiable. If you have $16,000 to spend, you better not spend $16,001. New banking technology makes it harder to charge your card beyond what’s available and will likely end up with an error or “card declined” message at the register if you try. In some cases, however, several pending transactions can go through at once, resulting in a mess of overages and the fees that follow.
Lending companies do not let you go over the limit without a cost. Fees of $35 or more for each overage and really add up. Do your best to keep your spending under control by not walking the line of your limit. Sign up for notification from your bank to alert you when you go within $500 to $1,000 of your limit, especially if you have various employees using the same credit account.
It Lowers Your Credit Score
The worst thing that happens with charging up your card is its effect on your credit score. Debt utilization is one of the big influences on your score, and anything over 20-30% used (depending on your card) can give the appearance that you’re desperate to use up those funds and may be a risky bet on paying it back. Banks want to know that you will make good on your loans, and that includes credit card charges. If you have a habit of getting dangerously close to the available credit line, expect your score to drop as a result.
Payment in full each month is the only way to make full use of a line of credit without this consequence (and some credit reporting services may still report you as having a very high utilization, depending on when they file their report.)
It Closes Doors to Other Goodies
We already know what happens if your score drops; you’ll be in a new lending category that makes it harder to get new credit. Worse than that, however, is that you can find yourself keeping the good stuff you love about your card. Banks have their own unique terms and conditions, but –if upon reviewing your credit score and accounts—they find that you’re a bad risk, they can downgrade your card to one with lesser perks or even raise your interest rate!
If you find that your bank has notified you that your account has been reviewed and changes have been made, look for language in the notice that explains when they will review again. If you can get your card paid off and credit score sorted by then, you’ll likely get your perks and rate back. If it doesn’t happen automatically, you can always call the bank and have them do a manual review.
(Note: Banks raise interest rates for reasons other than punitive action. When the Federal Reserve raises rates, cards do, too. Even if you do get your rate reconsidered, it may not go back to the original rate if prime rate has increased since the initial downgrade.)
Other consequences for a high-utilization of credit include removal of valuable balance transfer offers (the kind that could give you 0% interest or lower fees), as well as additional cards and waived annual fees. Make sure that you know what you might be missing if your bank starts second-guessing your creditworthiness. It may be worth more than having a little extra cheddar to spend on that credit card.
What To Do Instead
Charging up your business credit card may not be something you even realize you’re doing. It may be due to lack of communication with your teams or a failure to really understand your spending. Most cards have some pretty amazing tools to help you keep spending in check, through mobile alerts, email, and even card “freezes” once limits are hit. Proper communication with your card users is essential to keeping everyone clear on the rules for spending so that you don’t go over that line.
What if you spend because you have no other choice? That’s a different story. Funding crunches can cause a small business to look to an available credit line to temporarily deal with liquidity woes and get through to the next infusion of funding. It happens, and it’s not necessarily a bad thing if you see your cash issues resolving in the very near future.
If possible, spend a little on more cards rather than a large amount on one. It may take more advanced planning and discipline, but the rewards are clear: lower utilization equals more opportunity and less money out of pocket for the ability to borrow. If you are close to your limit, inquire about raising it. Not all banks will approve, but those that do can give you a bit of breathing room that will positively affect your score. (Just don’t ask for more than one at a time, and space them out. Asking for a higher limit can count as a hard inquiry on your score. It will lower it by a point or two as a matter of practice.)
You can also look at alternative means of funding such as P2P, small business loans, crowdfunding, or liquidation. There’s also something new on the horizon. With the recent Jobs 3.0 Act, more people can invest in small businesses than ever before. New groups of accredited investors will be popping up, thanks to looser requirements, and more flexible reporting regulations mean more companies may finally go public. Look for this development to result in an influx of investing groups ready to bring businesses the cash they’ve been anxiously hoping for from smaller investors with money to spend.
This article was originally written on December 3, 2018 and updated on January 27, 2021.