Paying your balance in full every month is ideal but if you can’t manage that, keep your balance as low as possible
Dear Your Business Credit,
We are a small startup company with two owners who have been in business for a year. We currently have two credit cards each for the business. We use our cards on a daily basis and make payments twice a month. We have therefore never exited the 30 days of payment, and never paid any interest.
My questions is if it would affect our credit score in a negative way if we made a purchase and instead of paying the full amount within the 30 days period, we paid it if off in 90 days. We would, of course, be charged interest, but my question is more about how it will affect our credit score? Looking forward to your reply. Thanks! — Caroline
See related: Will a maxed out business card hurt my personal credit?, Denied: 4 credit cards for 4 businesses, Closing a business card while preserving your credit score
First, congratulations on taking the right steps to build your credit — and for doing it so early in the life of your business. It’s great to hear that you are building a track record of staying current on your payments. That will help you later, if you need a bank loan to grow the business.
There are two types of credit scores a small business may be concerned with. Your personal credit scores — most commonly associated with FICO scores — count heavily when you’re starting up the company and must provide a personal guarantee to get a business credit card. But you may also be concerned with your business credit scores. Business credit scores offered by Experian, Equifax and D&B are all calculated using different criteria. Your credit utilization ratio — the amount of credit you’re using compared to how much you have available — may be one of those criteria. Your personal credit score may also be used in the calculation of your business credit scores.
Assuming you’re most concerned with your personal credit score, I can’t tell you exactly how it will be affected by the purchase you mention, without knowing the details of your personal finances. Generally speaking, though, a high credit utilization ratio will hurt your score. It’s smart to utilize a small amount of your credit to build a credit history, but using too large a percentage of your available credit will work against you.
Here’s why. FICO, one of the most widely used credit scoring systems, uses these factors in determining credit: Payment history (35 percent of score); credit utilization (30 percent of score), length of credit history (15 percent of score); amount of new credit opened (10 percent of score); and how successfully you handle a mix of revolving credit and installment loans (10 percent of score).
So how much credit should you ideally use? An oft-repeated piece of advice is to keep your credit utilization ratio below 30 percent. But, as credit scoring expert and CreditCards.com columnist Barry Paperno explained in his column, “Forget the 30 percent credit utilization ‘rule’ — it’s a myth,” “The lower your credit utilization is, the better — but it’s better to have something (a percentage higher than 0) than nothing.” He recommends 25 percent as the maximum for your utilization ratio.
It is also important to avoid maxing out any one card. If your purchase will bring your utilization of the credit available on any one card to more than 25 percent, I’d suggest spreading the debt around among more than one card.
That isn’t always practical, of course, if you’re charging just a single item. If that’s the case, rustling up enough money to make part of the payment in cash will help you avoid maxing out the card. As long as doing so doesn’t leave you in a cash-flow crunch, that approach can help you avoid a situation where you end up hurting your credit score.