Becoming Credit Card Savvy Part 1
Credit cards are a powerful tool for us as both individuals and small business owners, offering an easy and convenient way to manage cash flow, track and manage purchases and leverage business spending to earn rich rewards.
Many of us do not take full advantage of the benefits that credit cards offer; often because we are too busy running our lives and our business to delve into the finer details of our credit card benefits documents. This over the next three weeks we will break down the ins and outs of credit cards, showing you how to put plastic to work for you and your small business.
This week I will explain how to use credit cards to streamline accounting and make tax time a snap, buy yourself a little extra room in a cash flow pinch, maximize the rewards you earn for every dollar you spend and employ those rewards to boost your business and your life. We will focus on the benefits to a small business, but may of the suggestions works for your daily life as well.
Most experts recommend that small business owners use a business card because they simplify accounting, cash flow management and expense tracking, while also providing an opportunity to earn rich rewards you can use to boost your business. This also works for those of you without a business.
SEPARATE BUSINESS AND PERSONAL FINANCES
A small business credit card allows you to separate your business and personal finances in two ways. First, the card allows you to separate your business and personal spending. Second, the card allows you to separate your business and personal credit history.
One challenge many small business owners face is keeping your business spending isolated from your personal spending.
For example, if you need to buy a plane ticket to attend a conference and you lack a dedicated business card, you may whip out your personal airline rewards card without thinking about the fact that the business expense will get lost amongst the charges for groceries, household items and clothing.
Why is this a problem?
Mixing personal and business spending can cause major headaches at tax time, when you spend hours trying to sort the two types of expenses. And it can cause even bigger problems down the road if you get audited by the IRS. If you inadvertently include a personal expense as a business deduction, you could owe more taxes or even face civil or criminal penalties if the IRS believes the error was willful.
Using a dedicated business credit card for all of your business purchases makes it easier to keep your purchases separate.
When you open a personal credit card, the issuer reports the account to one or more of the three major consumer credit bureaus: Equifax, Experian and TransUnion. These bureaus keep track of credit card and loan account information and generate a credit report for each consumer, which is used to create a credit score that lenders use to help them decide whether to issue credit in the future and how much to charge for that credit. You can check your personal credit reports for free once a year at AnnualCreditReport.com.
One advantage of small business credit cards is that they generally don’t report to the three major consumer credit bureaus unless an account is in default. There are two main reasons you don’t want your business credit card account on your personal credit report.
First, having your business card reported on your personal credit would affect your credit utilization ratio, which is the amount of available credit you’re using at any given time. In general, using more than 30 percent of your credit limit may drive your credit score down, meaning you’d be less likely to qualify for credit and that you may get charged higher interest rates.
Having your business spending reflected on your personal credit could throw that ratio out of whack.
Take the example of a dentist who charges a $50,000 machine on a credit card. Before that purchase is paid off, it could reflect the use of a large portion of available credit. That could drive the dentist’s score down, even if he or she quickly pays off the purchase in full.
Second, your business credit card spending may affect another important measure of creditworthiness, your debt-to-income ratio, which lenders scrutinize before giving a loan like a mortgage. Most lenders want to see that ratio under 30 to 35 percent.
So, your business spending could push up your debt total and cause you to pay thousands more in interest over the life of the loan or, in a worst case scenario, to get denied for a mortgage.
IMPROVE YOUR PURCHASING POWER
Business cards may provide higher credit limits than personal cards, giving a business owner more spending power.
The card issuer sets the limit commensurate with business revenue, and some issuers will allow credit limit leeway for business owners. American Express, for example, may allow for spikes in usage if the business owner calls ahead of time to notify the card issuer that they’ll be making a larger-than- usual purchase.
Having a business card with a generous credit limit can provide plenty of spending power for months when expenses are high, allowing you to buy an expensive piece of equipment for your business or purchase plane tickets for a group of employees to attend a conference.
Having a high limit on one card prevents you from having to divide purchases amongst multiple cards or worry that your card will get declined.
EASILY MANAGE BUSINESS FINANCES
Business credit cards can help you manage accounting, cash flow and expense tracking. Business card issuers provide spending statements broken down by user- defined categories, which simplify accounting.
The easiest way to access and use these statements is to log in to your account and tweak the reports to break them down into the spending categories you use in your small business. The reports will sync with most small business accounting software, including Intuit QuickBooks and Microsoft systems, which makes it much easier to complete your tax returns at tax time. It saves a tremendous amount of time and money.
ASSIST YOUR CASH FLOW
Business credit cards also help with cash flow for business owners who need a little wiggle room to deal with late paying clients or unexpected expenses.
Putting an expense on a credit card gives you the rest of the billing cycle, plus the grace period, to come up with the cash to make your payment. If you need even more time, call your issuer to ask for an extension of the grace period.
This can often buy you an extra ten days. Card issuers typically don’t offer this courtesy on consumer cards, but understand the cash flow issues small businesses face. If an issuer agrees, ask for an email confirmation, so you have written proof of the extension.
REPLACES PETTY CASH AND EMPLOYEE REIMBURSEMENTS
Business card issuers typically offer the option of obtaining extra cards on the same account for employee use. Most business card issuers allow you to set customized spending limits for each employee, which eliminates the need to process reimbursements and makes it easier to keep tabs on employee spending.
For example, you might cap an employee who only buys office supplies at $200 in purchases per month, while you may allow an employee who makes frequent business trips $2,000 a month. Look for a credit card company that offers you the option of viewing spending reports broken down by person, which will help you monitor and control employee spending.
TAKE ADVANTAGE OF PERKS AND REWARDS
Business cards may offer bigger benefits than personal credit cards. Business cards usually have larger sign-up bonuses than the equivalent consumer cards. Small business owners can easily earn 50,000 to 60,000 points, worth at least $500 to $600, for opening an account and spending $3,000 to $5,000 in the first couple of months the account is open. Business cards also allow you to earn a higher number of points than you would with a consumer card, and they offer a wider array of valuable perks geared toward business travelers, like airport lounge access wider array of valuable perks geared toward business travelers, like airport lounge access
WHAT DOYOU NEED TO KNOW BEFORE YOU APPLY FOR A BUSINESS CREDIT CARD?
Business credit cards have many benefits, but they’re not always a boon to business owners. Whether you’re shopping around for your first business credit card or you already have one or more and are looking for a new one with richer rewards, it pays to be aware of the downsides of business cards.
BUSINESS CARDS MAY LACK CONSUMER PROTECTIONS
The 2009 federal Credit Card Accountability Responsibility and Disclosure Act, known as the Credit CARD Act, implemented rules to protect cardholders of consumer credit cards. The law doesn’t apply to business credit cards, but some business card issuers voluntarily extend these consumer protections to their cardholders.
If a business card issuer doesn’t extend all of the CARD Act protections, these are some risks a small business cardholder faces:
Surprise interest rate hikes. A business card issuer could suddenly raise the interest rate on a card and even apply the new rate to an existing balance.
Application of payments in a way that benefits the card issuer but costs the cardholder. If you take a cash advance at a higher interest rate, then make a partial payment on your balance, a business card issuer could apply your payment to the lower-interest part of your balance, leaving the higher- interest portion on your bill to continue racking up interest.
Not giving you enough time to pay your bill. A business card issuer isn’t required to give you 21 days between the day the statement is issued and the date the bill is due. A shorter grace period could leave you scrambling to make a payment on time or cause you to get hit with a late fee.
Universal default. A business card issuer is allowed to charge you a penalty interest rate, a punitively high interest rate, based on information on your credit report that shows a late payment or other mistake you made on an account with another creditor.
Short notice on account changes. Business card issuers don’t have to provide 45 days’ notice of any major changes to the terms of your account, including changes in rewards structure, so you could get surprised with an immediate change to your card terms.
Also, on business cards an issuer is permitted to charge you an over-limit fee if you exceed your credit limit. A business card issuer may also impose a very high late fee, whereas consumer card late fees are capped at $25 if you’re not a regular late payer.
Look for a card issuer that voluntarily extends all or some Credit CARD Act protections to its business cards. In its 2016 business card survey, CardHub.com looked at the five Credit CARD Act protections mentioned above and found that Bank of America is the only issuer to voluntarily include all of those provisions with its business cards.
However, most other issuers offer at least some of those protections. BUSINESS CARDS MAY CHARGE HIGHER ANNUAL FEES
Business card annual fees vary, generally from under $100 up to $450 or more. As a general rule, it’s a good idea to add up the dollar value of the rewards you expect to earn based on any sign- up bonus you’ll receive plus the rewards for your average monthly business spending on that card.
For example, a $300 annual fee may be a good value if you get a sign-up bonus worth $800 and enough additional rewards to buy two business class tickets to Paris for a much-needed vacation. If you get no sign-up bonus and only $200 cash back each year from your regular spending, you might want to look for a card with either no fee or a lower fee.
Another consideration is to add up the dollar value of perks you’d otherwise purchase that are provided on the card for free. For example, the card may offer a free checked bag on each flight you take. If you normally pay to check a bag while traveling monthly for business, multiply the cost to check a bag times 12 to estimate the value of that perk for you.
Doing this math should give you a good idea of whether the annual fee is worth the cost.
BUSINESS CARD ISSUERS WILL CHECK YOUR PERSONAL CREDIT
Even though business card issuers generally don’t report business card accounts to the three major consumer credit bureaus, issuers will check your personal credit before approving you for a business card. Also, you’re personally liable for the charges you make on a business card.
That is just one more factor to weigh before applying for a business card.
Next week we will talk about the application process and how to use your card wisely.
Until next week,
Join me every Wednesday on my podcast “Unlocking the Secret to Living Rich”.
If you have questions or comments you can contact me at my email
firstname.lastname@example.org or find me on Facebook, Twitter or Instagram @cindybbrown777
Who is Cindy B. Brown? Cindy is a CPA, MBA, CFO, mastermind facilitator and board member of public and private companies, business consultant, entrepreneur coach and a foremost expert in the field of business mastery. Cindy’s purpose is to motivate, educate and inspire people to live their richest life. She is the host of “Unlocking the Secret to Living Rich”.