Note: While perfect credit is not a requirement to start a business, it does help if you need to secure a loan, purchase large amounts of inventory and supplies or need to rent office space. The guest article below shows how getting a credit card and using it wisely can boost your credit.
This post was written by Lance Surety Bonds, a nationwide surety company that issues bonds to a wide array of professionals. The agency helps answer the often-asked question: What is a surety bond? while guiding entrepreneurs through the start-up process.
Building your credit takes time and energy but can pay dividends in the future when you get better rates and conditions on loans and mortgages. The basic premise of building your credit with a credit card is easy: Don’t use your credit card too often, pay on time, and monitor your usage and your credit.
In order to evaluate your creditworthiness, banks and financial institutions rely on credit reports from three major credit bureaus: Equifax, TransUnion, and Experian. All keep track of what lines of credit you have been granted and how well you have maintained them. It is best to check your credit report from all three bureaus at least quarterly. Carefully peruse your report and check all of your credit inquiries, accounts, and financial activity. If you find suspicious activity, contact that credit bureau immediately and file a credit report dispute. The bureau will have 30 days to respond.
It is crucial to obtain credit cards that fit your budget and your financial circumstances. When trying to strengthen credit, you will want a credit card issued by one of the four major credit card companies: Visa, Mastercard, American Express, and Discover. Shop carefully for a credit card that has a low interest rate or APR and a decently high credit limit. A high credit limit with low usage is the best combination to help you strengthen you credit.
Getting your credit card is the easy part. The hard part is keeping on top of payments, your debt, and your credit usage. Paying your credit card bills on time is a must. Your credit card company will inform you of your card’s minimum payment and payment deadline. You must pay at least the minimum payment by the due date in order to remain in good standing with credit rating agencies. Even one missed or late payment can ding your credit score, potentially lowering it from “good” to “fair.”
You will also need to make sure to stay on top of your credit and how much you are. The FICO credit score, the grade assigned to borrowers that summarizes their creditworthiness, is the most widely used credit score in the United States. A major component in calculating one’s credit score is credit utilization, which is the percentage of credit that someone uses. Your credit utilization of your credit card is the balance you carry divided by the credit limit. If you go over 30 percent credit utilization, you run the risk of your credit score being impacted negatively. It is preferable to keep your credit utilization around 10 percent.
Don’t be so quick to close your credit card accounts that you no longer use. The length of your credit history also factors into your FICO credit score. The longer you have had a credit account open, the worse your credit score will be impacted if you close that account. It is not advisable to close your oldest credit card account or one that still carries a balance. Only close an account when you have paid off the balance and the card is relatively new or you feel you would not be able to control your spending if you kept your card open.
Strengthening your credit takes work and you must remain persistent in your endeavor. If you keep your credit utilization down, pay on time, and monitor your credit consistently, you will be on your way to stronger credit in no time.