busineses credit utilization

How Credit Card Utilization Affects Business Credit

For entrepreneurs, the advantages of a plastic credit card – convenience, ever-ready purchasing power are real. But what many may not realize is that the extent to which a company credit card is used or not used can negatively impact a business’s credit score. When that score is calculated, the “credit utilization ratio” – the amount of credit actually used as compared to the credit limit allowed – is a major factor, in addition to:

  • Payment history
  • Length of credit history
  • Outstanding debts
  • Past bankruptcies
  • Company size
  • Industry risk

How important is your credit utilization ratio?

In a word, very. In fact, that ratio alone accounts for almost one-third of the total credit score for your business. What credit-scorers, like FICO, want to see is a utilization ratio that stays below 30% and above 0%.

So, let’s say you have a credit limit of $10,000 on your card. And you use it to make a $5,000 purchase to replace a piece of vital equipment that suddenly stopped working. Your credit utilization ratio that month will jump to 50%.

Even if you pay off that balance in full the next time a payment is due, you’ll still get dinged for a while on your business credit score for breaking the so-called “30% Rule.” It doesn’t seem fair, does it? But the way the scorers see it, charging too much to a credit card is associated with being a higher credit risk.

If this happens once or twice, no big deal. But if it becomes a regular thing, if month after month you use more than 30% of your credit limit, your score will take a significant hit and your ability to get future loans for your business will be jeopardized.

Tips for keeping your business credit ratio in check

Monitor your credit card use – With a charge here, a charge there, credit card charges add up. Make a habit of keeping track in real time of how much you’re putting on your card. If you’re on your way to topping the 30% ratio, stop. Or, if you must, reach for a different credit card.

Spread your necessary spending over several cards – Buy what you need to buy, but without exceeding the ratio on any one card.

Set up alerts – Arrange to have your credit card company send you a text or email when your balance reaches the 30% threshold. Or better yet, when it’s less. At 20%, for instance, you’ll have time to take steps to make sure your balance stays in “the safe zone.”

Consider making multiple small payments – Rather than one large monthly credit card payment, keep the lid on your available balance by making a payment anytime you’re in danger of exceeding 30% of your limit.

Think ahead

A low business credit score can be a major obstacle to getting additional funding, especially from traditional lenders like banks. For alternative online lenders, credit score is a factor, but not necessarily a deal-breaker. Either way, it’s wise to keep “The 30% Rule” in mind as you use your company credit card(s) in your business.