Need Business Credit? Build Your Personal Credit First
A lot of Americans like to abuse credit cards, racking up consumer debt that they can’t even pay off. If you look at the average American, most of them are living paycheck to paycheck with very little in savings, if any at all. This specific situation is what makes credit so appealing. They can leverage it instantly and get whatever they want now instead of working for it. This impatience has caused credit card debt to continuously grow since the big crash in 2008.
However, there is good news. Credit cards can be very useful and helpful for the average person if they use them correctly. Having a good credit score allows you to qualify for certain things that you wouldn’t get if you didn’t have one. In this article, I’m going to be breaking down some simple steps on how you can build your credit, how you can avoid credit problems, and why it is helpful when it comes to business.
Pay on time
This is one of the biggest reasons why many Americans get themselves into credit card trouble. They fail to pay on time. Instead of paying the whole debt off, they make the minimum payment or no payment at all. Credit card companies love these people, as credit card companies earn interest on the debt owed. All in all, keep track of when things need to be paid off. This will help build your credit.
Only credit things you know you’ll pay back
This is kind of an addition to the first step. Only purchase things during the month that you know for a fact you’ll be able to pay off. This step is pretty self-explanatory. Don’t take out a car loan of 500 a month if you only earn 1000 a month. Some of the little items you can buy would be groceries, utilities, and other small bills.
Good Debt vs Bad Debt
In Robert Kiyosaki’s book Rich Dad Poor Dad, he explains the difference between good debt and bad debt. In short, good debt is debt that creates more money, or capital while bad debt is consumer debt that basically becomes a liability. For example, the good debt would be a loan on a rental property that is earning you cash flow every month. Bad debt is consumer debt like car loans, a loan against your car, and food expenses, things you can’t earn money on. Eventually, that cash flow will pay off all of the debt for the property and it will have positive cash flow every month.
Become an authorized user on a parent’s credit card
If a parent has a good credit history, ask if you can become an authorized user on their credit card. You don’t even have to make purchases with the card and will begin to build credit.
Get a card with a low spending limit
Like I said earlier, high expenses can become a huge burden. If you are just starting out on your journey of building credit, it may be a good idea to take out a card with a low spending limit. This will make it easier to pay off every month.
After you have applied these steps to your personal life, you can then apply them to your business. It’s important to build good habits first with yourself before your business. A lot of business owners leverage credit for many reasons. We’re going to be going over some of these reasons in the next section.
A lot of small business owners use credit to leverage instant currency that will help them build their business and get it off the ground. This step can either be very costly or very beneficial. On one end, you could lose everything and be stuck with a heavy debt burden. On the other hand, that credit could grow your business faster than if you had not used any leverage at all. At the end of the day, it is a risk that some business owners have to take. However, for first-time business owners, I wouldn’t recommend taking out a loan at all. I would fund it all with cash.
By putting all of your business expenses on a single credit card, it makes it extremely easy to track where all of your money is going. You can easily access your monthly statement and see everything that needs to be paid off. This will not only help you as a small business owner, managing expenses and all but it will also help your accountant. You two will both be happy when it comes to tax season.
Credit cards companies love businesses. They typically have more capital than the average person and need a lot more financing too. Because of this, credit card companies offer huge sign-up bonuses as well as many rewards if your business sides with them. You can also get 5% rewards on your business expenses. In the end, these rewards and benefits add up. You can also save on both accommodation and air travel given the credit card.
In the end, credit isn’t a good or bad thing. It’s all about how you use the credit that you are leveraging. All in all, make sure you will be able to pay back the debt you are acquiring. Also, try to keep the interest rate as low as possible when trying to build credit. Financial planning is key when building a business.