COURTESY: Yolanda Ransom – SEPTEMBER, 2019
As an entrepreneur, you have taken on the bold task of creating a new reality for you, your family, your clients and the world. A new reality which involves not only drawing on your personal and professional resources, but one that also draws on your financial resources.
Now, in addition to managing your time, energy and money in your personal life, you are managing those same things in your business. This can be quite a challenge to balance. However, there are 3 keys to setting yourself up as strongly as possible for financial success in your business. By practicing and putting into place these 3 keys, you will be able to take advantage of all the financial opportunities available to you as an entrepreneur.
In this three-part series, you’ll learn the 3 most important foundational elements to establish your business upon. By implementing these 3 keys regularly, you will enable your business to grow, and help create long lasting wealth.
In this first part of the series, we’ll start with one of the most important financial tools which impacts your capacity, opportunities, and success as a business owner: your credit score.
Part 1: Build the Best Possible Credit Score
Like it or not, credit and credit scores are permanent facets of finance in today’s world. Your credit management skills and credit score impact every area of your life—including your business. As an entrepreneur, you will have two scores: a) your personal credit score and b) your business credit score.
If you decide that you’d like to seek a business loan or business financing at some point, you’ll find that companies will request your personal credit score when considering your application—especially if you’ve only been in business for a short while. In this case, since no established credit score exists for your business yet, potential lenders will review your personal credit score to assess your ability to manage credit and loans. This is one very important reason that you will want to build up—and keep—an excellent credit score.
Mastering your use of credit will enable you to build—and maintain—the best possible credit score possible. And doing so will position you and your business for receiving the best possible interest rates, credit offers, and loan amounts.
Following are some “dos” and “don’ts” on how to effectively use credit to create the best possible credit score:
1) Use credit cards for monthly staple items
Use your cards monthly for staple items you need to purchase—like groceries, gas, etc.—and that you normally pay for with cash. Regularly using your credit lines will prevent them from being closed due to inactivity, and will show a positive habit of using credit, which can help increase your score.
Contrary to what many people believe, avoiding or not using your credit cards does not help improve your credit score. To help improve your credit score, you need to use your credit. This can be very scary, especially if you’ve fallen into trouble or debt before when using credit. However, as a business owner, you’ll need to learn how to become disciplined in how you use credit so that you make it work for you, and not against you.
2) Set up recurring payments for fixed monthly expenses
Another way to regularly use your credit cards, is to pay specific monthly fixed expenses by setting up recurring payments. Fixed expenses are ones that stay the same every month. For example, cell phone, cable or utility bills. If you don’t want to deal with remembering to use your credit card every month, setting up recurring payments is a simple way to make sure your credit stays active. You can set it up and forget about it! Then just pay your credit card bill once per month, and you’re all set. Regular activity (along with prompt payment) each month will help boost your credit score.
3) Pay balances in full each month
This is key to increasing your credit score: pay your credit card balances in full every month. This is the fastest way to improve your credit score. Why? Because your debt-to-credit ratio will decrease more rapidly. The more of your credit lines available, compared to the amount you owe, the better your credit score will be. If you pay balances in full each month, and have a zero balance, you will not only avoid paying interest, but you will also reflect an excellent payment history. Payment history is the factor counted most heavily when calculating your monthly credit score (35% of credit score).
4) Pay before the statement runs
Yes, you can do this! You don’t have to wait for the credit card company to generate a statement before you pay it. Once the purchase posts, you can go ahead and pay it (in full). This will help you pay off your new purchases faster. Plus, it will help you avoid creating debt through delaying payment long enough for interest to start being charged on your purchases, and minimize your debt ratio. Both of which will help raise your score.
- Don’t spend more than you would with cash
When using your credit cards for groceries, gas, etc., don’t start tossing in extra food, magazines, and other things that will cause you to spend more than you normally would with cash. Overspending is what creates debt, because you do not have the money available in your budget to pay your new balance in full. Not paying your balance in full is called “carrying a balance.” The longer that you carry a balance on the unpaid portion of past purchases, the longer this amount is reflected on your monthly credit report. This in turn pulls down your score, because amounts owed are the second biggest factor (30% of credit score) affecting your monthly credit score.
- Don’t carry around more than one credit card
Especially if you’ve had a history of impulsive shopping, or past negative spending with credit cards, carry only one credit card at a time on you. It’s a good practice to carry a credit card for any emergency expenses that may come up. However, you want to minimize the temptation to “splurge shop” when you see a sale, or something that you want. Limiting yourself to carrying only one credit card will automatically minimize the ability to impulsively shop, as well as the temptation. Impulsive shopping results in running up balances that you are not able to pay in full that month, which usually causes your debt ratio to increase, and your credit score to decrease.
- Don’t charge without a pre-planned limit
Planning ahead for purchases that you will pay for with credit will allow you to successfully use your credit without creating debt. Credit card debt is created when you haven’t set a pre-planned spending amount in advance, based on your budget. Staying within your budget—whether for personal or business expenses—will enable you to spend carefully and consciously.
Unlike cash where you see and feel the money tangibly leaving your hands, credit “feels” unlimited. Because the payment transfer is done electronically and you never have to do anything but swipe or scan your card, the immediate impact of what you’ve spent is not seen or felt. So it’s FAR easier to go over budget with credit. To prevent this, decide AHEAD OF TIME how much you will spend based on your total budget, and charge only that amount.
You CAN create an EXCELLENT Credit Score
No matter where you are right now, or what credit score you have, by practicing deliberate financial behavior, you CAN successfully and regularly use credit to your advantage, to achieve a glowing credit score. Achieving an excellent credit score will enable you to access lines of credit, credit cards, and business loans with far greater ease, if you desire them. An excellent credit score will also allow you to get the best rates on rentals of space, equipment, and other services as a business owner, because your credit score will reflect a history of low (or zero) debt, on time payments, and well managed credit.
Because of excellently managing my credit using the tips shared here, when I started my current business as a financial educator, I was automatically offered business credit cards by companies without even asking. I already had personal credit cards with these companies, which I managed well, so they sought to do more business with me based on my positive history of credit card use.
By consistently following the tips outlined, you’ll be on the road to excellent credit score, and the increased financial opportunities that they bring. In Part 2 of this 3-part series, you’ll learn about the importance of setting up separate business accounts, as well as which ones to set up for financial success as an entrepreneur.
About Yolanda Ransom
Yolanda Ransom provides personal finance education and training. The CEO & Founder of Yolanda Ransom Consulting, she is a speaker, trainer, writer, and consultant. A certified financial coach with over 20 years’ experience in the financial services industry, she has advised thousands of clients at companies such as NYC’s Office of Financial Empowerment, H&R Block, Xerox, and Chase Mellon Shareholder Services, and has performed over 100 one-on-one financial coaching sessions. Her motto is “If you don’t take control of your own financial future, no one else will do it for you. And you CAN.” She helps professional Black women take control of their finances and has empowered countless individuals to master their money and build wealth. You can find out more about Yolanda and her work at yolandaransom.com