Having a strong credit score certainly makes it easier to start up a new enterprise. Unfortunately, many business-savvy individuals have to put their entrepreneurial ventures on hold due to their poor—or sometimes nonexistent—credit histories.
Building credit might seem impossible for many young entrepreneurs, especially if they’re in school. However, the more they learn about basic credit management now, the better prepared they’ll be to secure the business credit they’ll need in the future. Although establishing a solid credit history does take time, young entrepreneurs should take a few crucial steps toward building their credit now.
1. Know what lenders look for
Before you begin searching for creditors and lenders, you need to understand what factors they consider when reviewing your application. A number of variables affect your credit score, and creditors and lenders also consider many of them. Yearly earnings, net worth, residency and utilities listed in your name are just a few factors that indicate your credit worthiness and financial stability. For example, making rent and utility payments on time factors into your credit history by letting professionals know that you’re responsible and reliable when it comes to paying bills.
2. Build experience with department store cards
We’ve all shopped at stores that try to convince us that we need to open up a store credit card to receive an additional percentage off of our purchase. Although the pitch is usually nothing more than a lackluster annoyance, store credit cards can help you build good credit.
Just be sure you make the minimum payment each month, and pay more when possible. Otherwise you’ll be left paying high interest rates that negate whatever you saved by signing up. Using a department store card will help you gain basic credit experience as long as you recognize how important it is to pay off your charges in a timely matter.
3. Take advantage of secured credit cards
It might be in your best interest to open a secured credit card if:
- you can’t be approved for a department store card
- you’ve previously fallen behind in credit card payments
A secured card requires you to provide a cash deposit before you can use the card. This becomes the limit for your account. For example, if you deposit $1,000 into the account, then you can spend up to $1,000. Similar to regular credit cards, secured cards might have processing fees, annual fees and application fees, so you should shop around for the best card with the lowest fees. Verify that the card provider reports to all three major credit bureaus; otherwise having the card will be pointless when it comes to building your credit.
4. Manage all cards responsibly
Once you’ve been issued a few cards, you must manage them responsibly. Don’t get caught in a downward spiral of charging frivolous purchases that you can’t afford. You need to have a means with which you’ll be able to pay your bills.
Make sure you can pay off at least part of your credit card debt each month. However, you should also remember that you don’t necessarily need to pay your balance in full each month. Despite the interest you’ll be charged, carrying a balance can actually improve your overall credit; a major aspect of your credit score considers how well you can manage debt over time, not just from week to week or month to month.
As a young entrepreneur, it’s okay to have a number of questions about credit. Just be sure you get the answers before you start applying for a plethora of cards and loans.