Question about credit cards and credit ratings for business

[Cal Carpenter]

So I have a small business. We have one credit card and no other debt (aside from amounts owed to suppliers within all the terms - nothing overdue etc, and no loans).

At the moment we have (let's say) a $10,000 limit on that credit card and a $6,000 balance. I'm wondering if, for long term credit rating purposes, it is better to avoid using the card and chip away at the stale old balance in small amounts (larger than the minimum of course) while paying as many other bills out of our bank account, or is it better to use the card more often and pay it off in bigger chunks with the cash I'm saving throughout the month by using the card? It seems like having the oldest stuff off the card is better, but I don't know if this idea of 'stale' debt vs 'fresh' debt exists outside of my head...

It seems like sort of a wash in terms of cash flow for me, and in terms of the amount of the balance on the card, but I don't know if it is better to use it more frequently or not. I know the general rule of using it at least once a month, and ideally paying off the balance each month. It will get used a little bit every month regardless of this bigger question, and we will be able to get the balance down to zero sometimes (I hope, LOL) but not monthly and not at the moment.

But in the longish run (2 to 3 years), we may want to apply for a business loan or other financing and I'm just wondering if there is a difference between the two methods in terms of building a good credit rating as a business. As I said, we don't have any issues in terms of overdue bills or anything so I think we're off to a good start, several suppliers have given us generous terms and increased credit limits, etc.

I'm just not sure how much of my consumer credit knowledge applies to business credit issues. I also may be overthinking this, as I tend to do, as bookkeeping/accounting is not my forte and it is the most confusing and scary of all the hats I wear at this business.

Any thoughts or ideas would be appreciated.

[flamin lib]

1. Credit scores are based on a number of criteria.

Total credit available.

% of available credit used.

Number of accounts. More is better unless you apply for a lot of then close together.

And "negatives" which include new credit inquiries, missed/late payments and such.

I think using the card and paying it off would be the better approach for FICO.

I use creditkarma.com to track my score and have signed up for some very attractive credit cards there. There are other sites but this is the one I use--YMMV. It's free and financed by the banks that offer cards through the site. It also offers advice on questions like yours.

[Cal Carpenter]

2. So a business credit rating is analogous to a consumer score

with basically the same criteria?

That's good to know. My personal credit score is quite good (thankfully) and I think that has helped with the business in terms of getting a lease and getting the business credit card we do have. I'll just keep doing what I've been doing, and work harder to get the balance paid down more consistently. We just had a bit of a cash flow crunch a few months back so I used it more than I would have liked to.

I'll check out that site sometime - thanks for the link! We may want another credit card at some point (but not for awhile - it's been less than a year since I opened the one we have) although I may prefer to do a small loan rather than credit cards if we plan things right and the extra expenditures will really result in higher revenue. I don't want to waste more money on interest than necessary. But if it helps our credit rating I may get us a second card in the next year or so just so our total credit avail and % used looks better on paper.

God, two and half years into this thing, revenue is increasing steadily, I haven't fucked up anything major, and I'm still a nervous wreck most of the time

[flamin lib]

3. I assume business and personal accounts are treated the same but don't base decisions on MY

assumptions.

Because the Consumer Protection Bureau won't let CCs increase interest on existing debt they use the highest rate they can from the git go. No more teaser rates. I currently have several cards and one or more usually offer 0% for a year on transfers from other cards (usually a one time 2% fee).

I would think any business loan would be less than 29.9% apr but if the debt is already on your card I'd pay it off ASAP consistent with cash flow demands.

I'll never finance a business on CCs again. Having recovered from one BK I don't want to do that again.

[Cal Carpenter]

4. Yeah, when we decided to do this, we committed to keeping it on a scale that

we could afford without getting loans or putting stuff on credit cards at the outset. We started on a shoe-string budget and I am forever grateful we had the foresight and ability to do that. It took a fair amount of sweat equity, and my spouse and I are doing almost all the work ourselves so it is exhausting, but if it does all go to shit or we decide we can't handle it anymore, the worst thing we'd have to deal with is breaking a lease. At this point our assets far outweigh our debts.

For the time being we're barely paying ourselves and the business is barely breaking even (in our industry, after 2.5 yrs that is considered a wild success, LOL), but the credit card balance isn't crucial. It is about the same as our revolving credit limit with our biggest supplier, for example. So I worry about it more than I need to, but better that than not worrying enough, I guess. And our rate is nowhere near 29.9%.

Interest tidbit about the reason for no more teaser rates - thanks for sharing. While we were researching the possibility of opening this business and working up a business plan, we talked to a couple who had opened a similar business a few cities away in 2003. They used personal credit cards for most of their start-up costs, and played the balance-transfer game to allow more time to pay it off. It worked for them, but that's because they kept getting new cards with temporary Zero interest rates. And now their business is doing very well.

I would have been very uncomfortable going that route so I'm glad we were able to scrape up the funds to get the doors open.