Business credit cards are one of the most practical forms of small business financing. Not only do they provide a revolving business line with an interest-free grace period, but they also help separate your business and personal transactions.
Getting a business credit card with bad personal credit can be challenging, but it’s not impossible. Here’s what you should know before you start applying.
Can You Get a Business Credit Card With Bad Personal Credit?
When you apply for your first business credit card, your company probably won’t have enough history to generate a business credit score. As a result, your prospective business card issuer will pull your personal credit report during underwriting.
As you’d expect, your chances of qualifying for the best business credit cards decrease as your personal credit score drops. However, there are often accounts available with scores at the lower end of the spectrum.
That primarily refers to secured credit cards, which require that you provide a cash deposit equal to your credit limit as collateral. If you ever default on your account, the credit card issuer can use the money to recoup its losses.
As a result, a secured card is safer for the creditor and easier to qualify for with a bad credit score. However, because business credit cards have higher credit limits than personal cards, you’ll need to provide a relatively high-security deposit to qualify.
For example, Bank of America’s Secured Business credit card may be open to borrowers with below-average credit but has a $1,000 minimum security deposit.
How To Build Up Your Personal Credit Score
You can get a business credit card with bad personal credit, but there’s no guarantee of success, and you’re usually limited to a secured credit card. As a result, it’s often better to focus on building up your personal credit before you apply.
Let’s explore some of the best ways to improve your personal credit score.
Dispute Errors on Your Credit Report
The three major credit bureaus, Equifax, Experian, and TransUnion, compile your historical credit data into a credit report. Creditors use the information in those reports to calculate your credit score.
However, no credit bureau is infallible, and their reports contain a surprisingly high number of mistakes. One study found that a whopping 34% of consumers have at least one error in their credit reports.
Unfortunately, even a single mistake can cause significant damage to your credit score. For example, your report could show that a timely payment was made late or display a higher loan balance than it should.
As a result, it’s worth reviewing your credit report for errors before beginning your credit repair journey. Fortunately, credit bureaus Experian, Equifax, and TransUnion make it easy to dispute any information you believe is incorrect online.
However, because they don’t share information with each other, you must complete the process separately with each of them.
Pay Your Bills on Time
Your payment history refers to how consistently you’ve made your monthly credit payments on time. It’s worth 35% of your FICO score, making it the most impactful factor in the algorithm.
As a result, paying your bills on time should be your top priority when you’re building credit. You must manage your finances responsibly enough to ensure that you never owe a debt payment you can’t afford to make.
That primarily means limiting your credit card purchases to a reasonable level. Generally, the safest approach is to keep your balances at or below your cash reserves.
In addition, be careful not to take on too many credit accounts. Expanding and diversifying your credit mix is beneficial, but it shouldn’t come at the cost of increased financial risk.
Finally, it’s a good idea to set your payments to autopay, which reduces the chances of missing a payment due to a clerical error. That’s particularly helpful when you’re juggling multiple credit accounts with different due dates.
Reduce Your Credit Utilization Ratio
Creditors know that because your income is finite, you can only take on so much debt. The closer you are to your limit, the more likely you’ll miss payments, fall behind on your obligations, and default on your accounts.
As a result, your outstanding debt balance is worth 30% of your FICO score, making it the second most impactful factor after your payment history. However, the gross amount is often less significant than its relative impact on your finances.
Because credit scoring algorithms can’t factor in your income, their creators use different metrics to assess how financially burdensome your debt levels are. The most important of these is the credit utilization ratio.
It equals your current balance divided by your credit limit. For example, a personal credit card with a $5,000 balance and a $10,000 credit limit has a 50% utilization ratio.
People with a perfect 850 FICO Score have a 5.8% credit utilization on average. It’s generally regarded that you should maintain a ratio between 1% and 10% if you want the highest credit score possible.
That shows lenders that you’re actively using the account, but you can easily afford to pay off your balance every month.
The closer your utilization gets to 100%, the more lenders suspect that you’re experiencing financial distress and struggling to afford your debts.
Pay Off Your Balances
Paying off your outstanding debt balances is the fastest way to reduce your utilization. You can get by making your minimum payments, but it’s worth putting additional cash toward the issue when you’re rebuilding credit.
One approach is to prioritize paying down the account with the highest interest rate. That’s called the debt avalanche method, which minimizes your financing costs and time in debt.
Fortunately, every extra dollar you can put toward your debts each month has a significant effect. For example, say you have a credit card with a $3,000 balance, a 16% interest rate, and a $60 minimum payment.
If you settled for making the minimum payment, it would take six years and 11 months to pay off your debt, during which you’d incur $1,976 in interest.
However, if you put just $60 more per month toward the account (for $120/month total), you’d get out of debt in two years and seven months and incur only $673 in interest.
As you can see, freeing up even a little cash flow by cutting back on your expenses or picking up a side hustle can help you rapidly improve your credit and financial situation.
Request Credit Limit Increases
Paying off your outstanding debt balances isn’t the only way to reduce your credit utilization ratio. It’s also a good idea to attack the problem from the other end by requesting credit limit increases.
That won’t reduce your utilization as efficiently dollar-for-dollar as paying off your debts. However, the effects are permanent, and you’ll be able to carry a higher balance on your card without damaging your credit.
For example, say that your typical statement balance is $2,500 on a card with a $5,000 credit limit, so your utilization hovers around 50%. Increasing your credit limit to $10,000 would reduce your utilization to 25% without costing you anything.
Generally, you should only request limit increases after demonstrating responsible credit habits to your credit card company. You’ll have better odds once you’ve made timely payments for at least six months to a year.
Avoid Opening Too Many New Lines of Credit
When you apply for a new credit account, your prospective creditor initiates a hard inquiry and formally pulls your credit report to check your score. Subsequently, that event shows up in your credit report, which lowers your score by a few points.
The damage from a single hard inquiry usually isn’t a cause for concern. Your score will recover after 12 months, and the inquiry will fall off your credit report entirely after 24 months.
However, too many inquiries in a short period can have greater repercussions. That’s because applying for a lot of credit too quickly indicates to a prospective lender that you’re experiencing financial distress and turning to debt for relief.
There’s no specific threshold where you officially have too many inquiries, but each one increases your perceived riskiness as a borrower. Try to accrue no more than one every six months to minimize damage to your score.
Be an Authorized User on a Credit Card
Becoming an authorized user on a credit card lets you make purchases on the account without being obligated to pay them back. It also adds the card’s history to your credit report, which can improve your score.
Fortunately, a friend or family member can add you as an authorized user to their card without either of you undergoing a personal credit check. Most card issuers let you complete the process online in just a few minutes.
You can also buy authorized user tradelines from vendors online, but it’s generally inadvisable. Not only do you expose yourself to potential scams, but creditors, credit reporting agencies, and credit scoring companies disapprove of the practice.
You’re better off saving your money and becoming an authorized user on a card that belongs to someone you trust. Make sure to choose someone who uses the card responsibly, or it won’t help your score.
Have a Variety of Credit Accounts
The diversity of your credit accounts is worth 10% of your FICO score. It’s one of the less impactful factors, but it’s still worth addressing when you’re trying to optimize your personal credit.
Start by aiming for at least three credit cards and one installment loan.
That gives you a mix of revolving and installment debt, the ability to demonstrate responsibility with multiple accounts, and a high enough credit limit to keep your overall utilization down.
If you don’t have the right mix of credit accounts yet, consider applying for whichever ones you lack. Just remember not to pursue them too aggressively. You don’t want to incur too many credit inquiries or overextend yourself financially.
Get a Credit Builder Loan
Having an installment loan in your credit report is beneficial for diversifying your credit mix, but it’s impractical to apply for one solely to build credit.
Not only are accounts like auto loans, personal loans, and mortgages too expensive to open without impacting your finances, but they’re also tough to get with bad credit.
If you don’t already have one of these accounts, consider opening up a credit builder loan to fill the void in your credit profile.
Credit builder loans don’t provide a lump sum upfront. Instead, the provider keeps the proceeds in a locked account as collateral. As a result, there’s usually no credit check to apply, making them ideal for people with poor credit scores.
You make payments toward the account like normal, and the provider reports them to the credit bureaus. Once you pay off your balance, you unlock your proceeds. You can often cancel early without penalty to get whatever portion you’ve paid off so far.
Avoid Closing Old Credit Cards
The age of your credit accounts is worth 15% of your credit score, and older is always better. The idea behind this scoring factor is that having a lengthier credit history means you have more experience managing debts.
The FICO algorithm considers the age of your oldest and newest accounts, plus the average age of your entire mix. As a result, it’s in your best interest to keep your credit accounts open indefinitely.
While you can’t do much to extend the life of your installment loans, at least keep your first credit cards open. It’s also a good idea to use them every once in a while to keep them active.
If you implement these tactics, you should see significant improvements in your personal credit score. Once it reaches 700, you should be able to qualify for a good business credit card or even a small business loan. Get started today!
Article by Nick Gallo, Due
About the Author
Nick Gallo grew up amid the bustling beaches of Southern California, where he developed a life-long love for the written word. He also had the good fortune of stumbling across the principles of financial independence at an early age, which convinced him to study business and start his career in public accounting.