Small business credit cards are a good way to cover various small business expenses. However, if a small business credit card account is used incorrectly, it can harm your business more than help it. We spoke with business owners and industry experts to identify key small business credit card mistakes to avoid.
Here are 25 small business credit card mistakes every small business owner should avoid:
1. Not Having a Business Credit Card
Julie Pukas, Head of US Bankcard and Merchant Services, TD Bank
A business credit card is a great way to track and evaluate your expenses, and it also offers the opportunity to earn cash back rewards on your unavoidable purchases. However, according to TD Bank’s survey of small business owners, only 46% of them have a business credit card. Not having one means you’re missing out on opportunities to track your spending and earn rewards on business expenses.
2. Using a Debit Card Instead of a Credit Card
Gerri Detweiler, Education Director, Nav
Business owners who want to avoid debt may get a business debit card thinking it’s the more responsible choice. But debit cards offer fewer protections. A business credit card offers full protection in the case of billing disputes and fraudulent use. And using a business credit card will help build your business credit, too.
3. Not Choosing Credit Cards that Earn Rewards
Jocelyn Baird, Consumer Advocacy Source, NextAdvisor.com
Not choosing a business credit card that earns rewards is a common mistake business owners make. Running a business means you’re going to be spending a lot of money, and using a credit card that earns rewards for business-related purchases means you’re getting something back for all your spending. Choose a credit card that earns rewards relevant to your business activity.
4. Leaning Too Much on Credit
Geoffrey Scott, Payments Consultant, PayMotile.com
Most small businesses use credit cards to fund the early stages of operation and to help with working capital. However, leaning too much on credit in an attempt to maintain greater equity should be avoided. In the event that the business doesn’t take off quickly or fails entirely, it can have a negative effect on your finances and your credit score.
5. Avoiding Credit Cards with Annual Fees
Eric Deegear, CMO Chief Marketing Officer, New Man Revolution
One big mistake that small businesses make with business credit cards is avoiding those with annual fees. However, business credit cards with annual fees can be beneficial because they usually offer huge rewards that, when used correctly, vastly offset such fees. By steering clear of annual fee cards, business owners are losing out on the full potential of reward-directed spending.
6. Not Looking For a Low APR Credit Card
Daniel Wesley, Founder, Credit Loan
A credit card with low annual percentage rate (APR) is a good option to use for large purchases. You will be able to save on costs if you’re forced to pay it off in monthly installments, and at the same time, enjoy its perks and rewards. When applying for a business credit card, make sure to choose the one where you can save the most.
7. Choosing Business Credit Cards that Report to Your Personal Credit
Josh Feinkind, President, RefinedKind Pet Products
If your personal credit score is important to you, avoid business credit cards that report to your personal credit profile. If you carry a high balance, even if you pay that balance off each billing period, it will still affect your overall utilization rate, lowering your credit score. Look for business credits cards that do not affect your personal credit score. If you’re not sure, ask before applying.
8. Using Your Business Credit Card for Personal Expenses
Nate Masterson, Marketing Manager, Maple Holistics
One of the biggest mistakes any small business could make with a credit card is not keeping their personal expenses separate from their business finances. Even though you document everything correctly and keep a record of both expenses, it will still create confusion in one way or another. It’s best to have a separate card intended for personal expenses and another for business.
9. Thinking Your Personal Credit Doesn’t Affect Your Business Credit
Shaun Moise, President, Scope Environmental Remediation
Some business owners who are new to using small business credit cards don’t know that their personal credit is a factor when it comes to qualifying for business credit cards. The higher your personal credit score is the higher credit limit and lower rates you can obtain for your business. Make sure to be responsible for paying your personal credit cards on time.
10. Deciding to Carry a Balance
Dave Barnett, Finance Author, DavidCBarnett.com
Although running a credit card balance may sound like it’s a normal practice, it’s best to never carry a balance. Failing to pay the full balance monthly, even if you just fall short by one cent, could cost you a high interest rate or finance charge on your purchases. This small mistake can lead to excessive fees and added interest that may significantly increase your total cost.
11. Not Using Your Credit Card to Pay Your Large Bills
Landon Howell, Head of Marketing, Plastiq
Most businesses have no idea that they can pay some of their largest, most important bills such as lease payments, vendor dues, and payables to contractors using their credit cards, depending on your credit limit. Just make sure to settle your credit card balance when due to avoid incurring interest. Using your credit card on large payments can earn you bigger reward points. However, be careful with this because sometimes it can incur a 3% credit card processing fee.
12. Making Late Payments
Steve Pritchard, Business Consultant, GiffGaff
Don’t wait to make a repayment on your business credit card. Aside from having to pay a late payment penalty, this can also lower your credit score. Credit reports typically indicate late payments in increments of 30 days, so if you have an overdue payment, it will be counted as 30 days overdue – even if it is actually less than this length of time.
13. Spending Beyond Your Business’s Means
Lou Haverty, Chartered Financial Analyst, Financial Analyst Insider
Be aware of your own business’s financial situation before you swipe your credit card to pay for your expenses. You should only be using your credit card within your business’s financial means. Your business should have a stable cash flow to be able to settle your credit card bills in full every month.
One of the reasons why new businesses use a business credit card is because they need to build their business credit to qualify for other types of business financing. However, according to Entrepreneur, there are lenders that don’t report your activities to the credit bureaus, and this doesn’t always help you build business credit. Make sure to choose a credit card issuer that reports to the credit bureaus to help build your business credit.
For more information on your business credit and who reports, you can check out our ultimate guide on business credit scores.
According to FundBox, using more than 30% of your available credit on a business credit card will negatively impact your business credit score. As a result, it harder for you to qualify for business financing like small business loans or lines of credit. If you do get qualified, your interest rate is likely to be higher than it would if you weren’t over-utilizing your available credit.
When applying for a credit card, it may trigger a hard inquiry with the credit bureaus. While new inquiries have a small impact on a credit score, if you apply for too many credit cards, it may create an impression that you or your business is struggling financially. Creditcards.com states that every inquiry represents a potential new debt, and this may not look good on your credit record.
For more information, you can read our ultimate guide on the effects of a hard vs. soft credit check.
One reason to choose one credit card over another is the rewards program it offers. According to CNN, while some rewards don’t come with an expiration date, others do. For some credit cards, you’re typically only given a few months to use your rewards or you otherwise lose them. It’s best to know both the reward points you earn and until when you can capitalize on them.
A No Preset Spending Limit (NPSL) credit card doesn’t actually mean that the card has no credit limit. According to WalletHub, it just means that a card’s spending limit is determined on a month-to-month basis. Usually, the card issuer will not inform you or the credit bureaus of your exact limit. This may decrease your credit score because of deceptively high credit utilization.
Although fine print is visually difficult to read and typically not easy to understand, it’s important to not ignore it. It’s necessary to understand the terms and conditions of your credit card to get the best deal for your business. Find Law suggests that you should know the terms for changing interest rates, the consequences for late payments, and the conditions that could affect how you use the card.
Closely monitoring your transactions is very important, especially with credit card fraud on the rise. Instead of waiting until the end of the month to review your statement of account and a list of what you spent, The Points Guy recommends checking in on your credit card activity on a daily basis.
Some credit card issuers will say that you’re “qualified” for their cash advance programs, making it sound like it’s a privilege. According to Investopedia, taking a cash advance is a bad idea because you typically start accruing interest the moment you take the advance. An automatic fee of typically between 2% to 5% is charged on the cash advance amount in addition to a higher interest rate on your regular purchases.
Some small businesses fall into the trap of unnecessarily using their credit cards to earn rewards. According to Credit.com, this could be costing you more than it is rewarding you, because altering your spending habits just to get rewards isn’t going to be as beneficial as you think. If you overspend and carry a balance, your interest charges will probably be higher when compared to your reward savings.
Some business credit card users close their account when they’ve finally paid off a high interest debt. However, while getting rid of a credit card may feel good, it can have a negative impact on your credit. For example, you reduce your available credit line, which increases your credit utilization. Bankrate recommends to keep the account open but use the card very rarely or not at all.
According to Reward Expert, if you’re only going to use one card, it pays to get the one that has transferable points. Some credit cards are locked into one reward program, such as airline- or fuel-affiliated, earning you points in just one program. Instead, it’s best to earn points with the credit card’s own program with a variety of partners, which provides you with flexibility to redeem your preferred reward.
For more information on credit card reward points, you can read our ultimate guide on how to maximize your small business credit card rewards.
According to Yahoo Finance, if you fail to register your business as a legal entity – such as a limited liability company (LLC) – you won’t be building your business credit even if you are issued a business credit card. Also, most card issuers will only issue a business credit card to business legal entities – so failing to register your business as one will likely make it impossible for you to qualify.
Bottom Line – Small Business Credit Card Mistakes to Avoid
Using a small business credit card can be beneficial for businesses with short-term financial needs and also for those who are trying to build business credit. However, although a business credit card can be helpful, using it the wrong way can put you into a lot of trouble. Do not ignore the above small business credit card mistakes as advised by the experts so you’ll know what to avoid.