Should I Get a Credit Card if I Have Poor Money Management Skills?

Credit Cards and Budgeting

Credit cards are a vital part of everyday life for the average person because they have become essential tools in the online marketplace. So based on the wide-spread scope and use of credit cards I wholeheartedly recommend that every independent adult carry a credit card. This simply makes life easier from many perspectives.

The benefits of owning a credit card are plentiful and include:

  • More efficient purchasing transactions
  • Safer and more secure financial transactions
  • Greater variety of payment options
  • Low or no interest fast-track credit
  • Card rewards and benefits
  • Credit building resources

While credit cards can be great tools, I emphatically recommend exercising sound financial management strategies when using them. This means that you need to plan and budget properly to avoid getting into debt or paying high interest rates. Obviously this isn’t easy for someone who has poor money management skills. However, all is not lost just because you may be a bit deficient in your budgeting skills.

There are ways that you can monitor and limit your own spending when you obtain a credit card. Such tools can help you take advantage of the many benefits of having a credit card while still enabling you to avoid or decrease credit card debt. So if you desire to have a credit card but you are have troubling keeping track of your finances, here are tips that can assist you.

Credit Alerts

If you are concerned about spending too much on your credit card from month-to-month you can set spending alerts on your card. Most major credit card issuers have this functionality on their online card management portals. You can simply set alerts to be sent via email or text message for you or secondary cardholders.

For instance, if you want to keep your spending limit to $500 per month you can set an alert to remind you when you reach this amount. This way you can curtail your spending before you reach your limit.

These types of alert systems are great for people who have challenges keeping track of what they spend but are easily able to control their spending. I personally like these type of reminder systems because they allow me to use my card while staying on track with my monthly budget. This way I can keep my credit profile active, yet not overspend or go into unnecessary debt each month. Also, I can earn cool cash, point, and travel rewards while staying within my budget.

Spending Limits

Another option is to set hard spending limits on your card that don’t allow you to go over the spend amount at all. Unfortunately, this option is only available if you are a secondary user on someone else’s account. But it is still a great option if you have issues with money management. You get to take advantage of this credit building tool while learning the art and science of money management.

Credit alerts give you soft reminders that you are approaching your credit limit. However, you can still go over the alert limit without interacting with your credit card management system.

If you are an authorized user on someone else’s account, they can set a spending limit for you which will not allow you go over this limit. They will have to change the limit in order for you to go over the spending limit. This option is great for young adults who are just starting out in life. They can be added to their parents or their spouses accounts even if they have no credit history.

This feature is not available on all credit cards so you need to check with your card issuer before applying if this is something that you are interested in. American Express is one of the few card issuers that has this feature on all of its cards. However, there are a few other issuers that have this feature for some of the cards in their product lines.

I have limited the spending limit on my children’s accounts since they are in the process of learning about money management. I give them a monthly budget and spending parameters so I set their spending limit to ensure that they don’t surpass their budgets. As they grow and become more responsible I plan to expand their spending limit.

Credit Freezes

Whether you have your own credit card or you are an authorized user on someone else’s card, a third option is to freeze the card. You can freeze your own account if you are the primary cardholder and you can freeze the accounts of authorized users. Freezing a credit card means that it can’t be used for new purchases by one or more authorized users. However, any prior authorized purchases or recurring payments from the card will continue unless you stop them.

This is a very effective option if you want to have a credit card handy for large or unexpected purchases. If you don’t use your card on a regular basis freezing it can also help protect it from fraud. This is also useful for those who have issues with controlling their spending.

Because I have several personal and business credit cards, I have frozen one of them that I don’t use on a regular basis. I actually plan to close the account before it incurs the annual fee payment at the end of this year. However, since I don’t use it and still want to have the credit line available to me for a while I have frozen it for me and all authorized users. This way I don’t have to worry if it gets lost or stolen since I don’t carry it with me like my the other cards that I use on a regular basis.

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How to Choose the Best Credit Card for Your Business

Choosing a Business Credit Card

When it comes to business finances, choosing the right business credit card is a must. Not only is a credit card important in establishing your business credit history, it is also a viable line of credit that your business can benefit from during periods of financial instability. Likewise, business credit cards are a great resource for separating personal and business expenses.

As with any form of credit, business credit cards are only as beneficial as you make them. If you spend and pay credit card debt wisely, business credit cards can be a great resource for you now and in the future. On the other end, if you are not responsible with your spending and repayment of debt you can encounter financial trouble. So be mindful of these dynamics when considering which credit card is best for your business.

Aside from issues related to personal responsibility, I have outlined some other elements that you should consider when applying for business credit cards. This list is organized according to level of importance as certain elements should take priority over other elements when it comes to acquiring a business credit card.

Credit Card Networks 

The first thing you should consider is the credit card network that corresponds to your business needs. There are four major credit card networks that offer both personal and business cards. American Express, Discover, MasterCard, and Visa are the most common credit card networks both in the U.S. and abroad.

American Express (AMEX) and Discover are both credit card networks and issuers. This means that these companies provide and offer their own credit cards to consumers without the use of a third party. However, American Express does work with some issuers such as Bank of America, USAA Bank, and Wells Fargo.

Visa and MasterCard are almost exclusively offered through third-party issuing financial institutions such as Capital One, Chase, and Citibank. Because these financial institutions issue Visa and MasterCard branded network cards they set their own terms, fees, rates, and benefits for their individual cards.

A credit card network is important because of its acceptance rate in the U.S. and abroad. Visa and MasterCard networks are accepted virtually everywhere globally. This obviously makes them a more popular choice for some business owners because of their level of flexibility.

American Express and Discover Card networks are accepted by many merchants, however, they are accepted at fewer places than Visa and MasterCard networks. Also, while the global reach of these networks is expanding it is fairly limited in the international arena in comparison to Visa and MasterCard.

On the other hand, both of these networks have amazing benefits and perks that are also attractive to business owners. In fact, American Express is my favorite network and it is the card that I use most often for personal and business finances because of it’s many other advantages.

As a business owner, you are not limited to one credit card network or issuer. You can have as many business credit cards that your company qualifies for. That being said, it may be a wise strategy to have two or more business cards from different networks and/or issuers. Having multiple credit cards can benefit your organization in a number of ways, which I will discuss later in this post.

There is no magic number of business credit cards that you should acquire. It all depends on your business needs. I personally have two business credit cards and I will possibly get a third one in the near future. Although American Express is my favorite card card, I also maintain a Visa credit card because AMEX is not accepted everywhere. I personally don’t like carrying too many credit cards so I maintain a limit of six credit cards for combined personal and business purposes.

Annual Fees

The second major consideration is the annual fee, which can range from $0 to $550 and sometimes more. While it may not seem like it from the outset, credit cards with high annual fees are oftentimes more beneficial to have than those with no annual fees. Of course, this is all relative to your situation and your business needs.

Zero percent annual fees are usually more appealing to business owners who wish to maintain low overhead costs or for those who don’t usually take advantage of benefits and reward systems. However if your business operations include frequent travel or credit card use, some premium cards with variable annual fees may be a good option for you.

Keep in mind that annual fees must be paid regardless of credit card use. So if you don’t use your business card frequently or you are not interested in the benefits or rewards available to you it may be best to select a no or low annual fee credit card. On the other hand, if you plan to use the card on a regular basis and/or if you desire certain card rewards, mid to high range annual fee cards may be a better option.

In the same way that you can get business credit cards from multiple networks and issuers, you can also get credit cards with variable annual fee rates. You may want to consider having one or more card with no annual fee and at least one card with an annual fee so that you can take advantage of certain rewards. Aside from the benefits and rewards that annual fee-based credit cards offer, business credit card annual fees are also tax deductible. This tax deduction does not apply to personal credit cards used for business-related purchases.

Annual Percentage Rate 

The third major consideration is the annual percentage rate (APR) more commonly referred to as the interest rate. This is the amount that you pay on balances that you carry from month to month. This can range anywhere between 13.99% to 24.99% or more depending on the type of card that you have.

Business credit card rates are based on a number of factors including prime rates, business credit history, reward programs, etc. Credit history is definitely a defining factor in interest rate assignment, however, it is usually not the greatest factor when it comes to cards with reward programs.

I consider the interest rate to be secondary to the annual fee because it is completely within the control of the card holder. If you don’t carry a balance, you don’t pay interest. However, if you do carry a balance you will pay a penalty from month to month. So while the APR should be examined when applying for business credit cards, your spending habits should also be a deciding factor in regards to the APR that you accept.

Benefits

The fourth thing you should think about is the card benefits. Every business credit card comes with a standard set of benefits. Such benefits are automatic and do no require the cardholder to make purchases or participate in other activities in order to redeem them. These benefits usually include fraud alerts and protection, car rental insurance, purchase protection, extended warranties, concierge services, etc.

While often overshadowed by glamorous reward programs, credit card benefits can be quite useful in many cases. They can save you from purchasing rental insurance during business trips or provide you with road side assistance. They can help you stay on top of your credit history by providing you with monthly credit score reports and instant credit activity or fraud alerts among other things.

Reward Programs

There is so much competition among credit card networks and issuers in today’s world that it can be complicated trying to decide which credit card is right for your business needs. All major credit card issuers have established comprehensive reward systems at every tier. And this is the main way that they entice credit card consumers.

As a result, most prospective credit card applicants focus on the benefits of the card before considering the above-mentioned factors. While reward systems can certainly make the case for selecting one card over the other, it should not be your top motivating factor when selecting a business credit card. Instead, it should actually be the last motivating factor.

While sign-on reward offers can appear quite enticing it is very important to read the fine print. Some of these perks are temporary, which means that they decrease in value or altogether disappear after an introductory period.

That being said, many reward systems can be quite handy at times. In fact, some issuers have very comprehensive and advantageous reward systems that are definitely worth the cost of the annual fees. In general, the higher the annual fee the greater the benefits you reap from the reward program. Some of the most common rewards include cash back, points, and travel.

Cash Back

Cash back reward systems generally range anywhere from 1-5% for every dollar spent. Usually the more cash you get back, the higher the annual fee. Sometimes the annual cash back rewards that you receive simply offset the annual fee. In which cash, you don’t lose or win anything. However if you spend enough or you have a no-annual-fee cash back reward system, you may be able to pocket a decent amount of cash every year.

Business credit cards

A number of cash back reward systems also come with some quite generous sign-on bonuses. For instance, you may have to spend $3000 within the first three months of opening your account to get $500 worth of bonus cash back. In which case a $95 annual fee is covered 4 times over.

Cash back rewards are generally the most versatile of the most common reward systems. When you get cash back you can spend it however you please. You are not locked in to using it with one vendor or on specific items. Yet, at the same time this type of reward system is very flat. It generally doesn’t come with other perks and it is solely based on how you use your business credit card.

Points

Points-based reward systems are similar to cash in that they are usually flat-rate programs that only include points. They are also fairly versatile in terms of the rewards that are available through the program. However, it usually takes longer to receive these items because they have to be processed and mailed to you. It can take anywhere from 2-12 weeks or longer to receive items redeemed through point reward systems.

Business Credit Card Rewards

Points can be redeemed for various items inclusive of apparel, business supplies, gift cards, electronics, household items, and even travel. Sometimes point rewards can even be redeemed for cash.

Travel

Travel rewards are my personal favorite, which is why AMEX is at the top of my list. American Express has one of the best travel reward programs available right now – only Chase is conquerable to it in my opinion. Our family literally once paid for all of our travel expenses inclusive of 4 first class airplane tickets, and a 7-day hotel stay and rental car with our travel rewards offered through my AMEX card.

Business Credit Card Rewards

A number of other credit card companies also offer travel business credit cards. Travel reward benefits often include free or reduced cost airplane tickets, hotel stays, car rental fees, and more. These types of cards are for serious travelers as they reward users who pay for airline, hotel, and other types of travel with their card.

Though well worth their value, travel reward programs usually come with steeper annual fees. Most of the top tier travel reward business credit cards boast an annual fee of anywhere between $250-$595. Such programs generally include free annual airline tickets or fee credits, airport lounge access, rental car insurance, and more. This means that you can easily get double or triple the value of your annual fee depending on how you use your card and your reward program.

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Why Business Credit is Important for Start-Ups

Business Credit

One of the first things that I advise new business owners to do after they have established a legal business entity is to start building business credit. Business credit is just as important as personal credit as it serves the same purpose, which is establishing financial credibility and accountability. In the same way that an individual is required to have a decent and substantial credit history to borrow money for purchasing a car, home, etc., a business needs the same type of credit history to get loans for certain business expenses. This is usually not a concern in the beginning, but it can be a major factor as a business expands and grows.

Even if you have the start-up capital to finance your business venture, you may need to borrow money in the future. Banks and other financial institutions consider business credit history as a major factor when deciding on credit and loan approval, limits, and interest rates. This is why it is important to begin establishing business credit as soon as you have all the necessary qualifications to apply for business credit cards, loans, and lines of credit.

Business Credit Cards

Business credit cards operate in much the same way as personal credit cards. In fact, many of the major credit card companies use your personal credit history when they decide to issue you a business credit card. However once they issue a business credit card, the card activity is recorded as part of the business credit history, and in some cases as part of your personal credit history too.

In order to apply for a business credit card you will need to apply under the legal name of the business using the employer identification number, business structure information, business address, and business and personal financial data, etc. As mentioned earlier, you will also need to use your social security number since your personal credit history will be used to secure the business credit card. This is why it is not necessary for you to have an established scream of revenue in order to get approved for a business credit card.

There are several tiers of business credit cards that you may qualify for depending on your personal credit history and score. Many credit card companies issue secured, standard, and premium line business cards to start-up companies.

Secured credit cards are one of the best options for entrepreneurs who have little to no credit history or fair credit scores. This type of credit card requires the holder to secure the credit card with a cash deposit of variable amounts. The cash deposit amount is generally the credit card limit, which means that you are effectively using your own money to establish credit. Even though you are using your own money, the credit card company still reports your activity to credit reporting bureaus which allows you to build or rebuild credit.

Standard business cards are great for entrepreneurs with good to very good credit scores. These borrowers can generally get a standard business credit card limit of about $2,500 to $5,000 depending on their credit score. Premium credit cards are generally reserved for individuals with exceptional credit scores. These cards come with higher credit limits and optimal reward systems. Individuals with exceptional credit scores can usually obtain standard or premium credit card limits of $10,000 or more.

In addition to establishing business credit, business credit cards can help you keep business and personal expenses separate, increase your purchasing power, and take advantage of nifty reward programs.

Small Business Loans

Business owners usually only consider business loans when they have a direct need for a loan. This is generally a good strategy. It is best not to borrow money unless you need it for a specific purpose. And, if you need to it is vital that you pay the loan back according to the payment terms. Doing so will help you maintain and improve a good business credit score.

I typically don’t advocate loans for the mere sake of borrowing money. However, for the sake of establishing business credit a small business loan may be a viable option. If you think that you will have a need for larger business loans in the future it is best to start building your loan borrowing history by taking out smaller business loans even if you don’t have a specific need for one.

Loans may reflect differently on your business credit report than credit cards based on utilization and payment habits. Credit card usage can be variable and are considered revolving debt on credit reports, which means that your business credit score may fluctuate often depending on your credit card usage. On the other hand, loans are a great way to establish a more stable business credit history.

The benefit of business loans over credit cards is that interest rates tend to be lower and loan amounts can be much higher. Repayment terms are fixed and you don’t have to worry about variable interest or other fees often associated with credit cards.

For these reasons, business loans are generally more difficult to get approved. You may need collateral, a co-signer, or other guarantors to secure a business loan. This is why I recommend starting with smaller loans in the beginning phase of your business. Doing so will allow you to develop a relationship with your lender and establish your business loan borrowing history.

Business Line of Credit

Establishing a business line of credit is another way to build business credit. Small business lines of credit are not as well known as business credit cards and loans. However, they are just as viable of an option as credit cards and loans. In fact, a line of credit shares similar aspects of both options but operates more like a credit card than a loan in many regards.

Most business lines of credit are unsecured like credit cards though they tend to have higher limits similar to loans. Credit limits for lines of credit are usually between $10,000 to $100,000 – anything over this threshold must be secured. In this way, a business line of credit is generally easier to qualify for than a business loan because it doesn’t require the use of a guarantor, in most instances.

A business line of credit is considered revolving debt because borrowers only pay interest on the amount borrowed. For instance, you may qualify for a $50,000 line of credit but only borrow $10,000 from the line of credit initially. In this case, you will only pay interest on the $10,000 though the $50,000 is still available to you. This is the same way a credit card works.

It is important to note that a business typically needs to be in operation for a longer time frame to qualify for a line of credit. Additionally, repayment terms may be shorter or more frequent when borrowing from a line of credit. Some lenders require weekly repayment and some may require six-month or shorter repayment terms. As with credit cards and loans, line of credit utilization is reported to business credit bureaus and is used to determine business credit scores.

Business Credit

Interest rates on business lines of credit tend to be lower than rates and fees associated with credit cards. Credit limits are typically higher than business credit cards and approval is generally easier to obtain than with business loans.

Summary

As with personal credit, it is very important to borrow wisely and repay debt in a timely manner. As mentioned throughout this post, business credit card, loan, and line of credit activity is reported to credit bureaus. The ultimate goal is to ensure that you only borrow what you need and that you repay your debt in accordance with the terms and conditions of the creditor. Following these guidelines will help you build a strong credit history for future borrowing needs.

Need more guidance with your start-up? Contact us so that we can help you understand the critical steps that you need to take to get your business up and running.