How to build a good credit score
When you’re ready to grow your construction business, a good credit score will help. And in many cases, credit cards are actually the best option for establishing a desirable credit profile. A clean credit profile leads to a higher credit score, which will later help you qualify for lower interest rate credit cards and a line of credit for your construction company.
A credit card is basically a high-interest loan in a portable and convenient package. But not all credit cards are created equal. They vary widely in interest rates, fees, introductory rates, rewards, balance transfers and other factors. Most of the credit cards available to professional contractors that have no prior credit charge exorbitant fees and high interest rates.
Build a good credit score using credit cards
If you have no credit history, a safe way to get started on the road to a good credit score is a “starter”, or secured, credit card. Most credit card companies and banks offer this type of credit card – with guaranteed approval, regardless of scores, credit history or other negative points.
A secured card looks and works like a regular credit card with one major difference: You must maintain a bank deposit to secure it. The deposit is the lender’s collateral in case you don’t make your payments. With a secured credit card, your credit limit is usually 60 percent to 100 percent of the balance you keep at the bank. For example, if the bank or credit card company keeps $1,000 of your money on deposit, you can charge $600 to $1,000 on the card. That $1,000 deposit can’t be used to pay your credit card balance.
While a secured card usually has high annual fees and a steep interest rate, this type of card will definitely help improve your credit rating, as long as you make regular payments and never go over the credit limits established for the card. Usually after a year of using the card and sticking to its requirements, the issuer or bank will increase your credit limit or provide you with a standard unsecured card. You might even be able to get your own business credit card. (A key advantage of a business credit card is that it allows you to keep personal and business expenses separate.)
Another major benefit of credit cards is that most credit card companies include extended warranty protection on the purchases you make with their cards. This can be a great benefit if problems come up with the products or services you purchase; your credit card company will assist in a resolution. Consider it free buyer’s insurance. Other incentives include rewards programs (rewards can add up quickly if you make large business purchases with the card), merchant discounts and zero liability in the event your card is lost or stolen.
If you have credit cards you seldom use, keep those accounts open. Closing accounts can actually lower your credit score.
In addition to credit cards from banks and credit card companies, consider opening credit cards with the companies you buy tools and materials from. They are usually easy to get, and if used wisely, these cards can have a positive impact on your credit score. Keep the cards active by using them at least once or twice a year. Regardless of the type of credit card you choose, to achieve a good credit score you should:
- Always pay on time. It helps you avoid late fees and penalty interest, and is essential to maintaining a good credit record.
- Pay more than the minimum payment required. Try to pay as much of the total as you can. You’ll pay less in interest charges and pay off your balance much sooner. If you can, pay the entire balance on the card every month and avoid all interest charges.
- Stay within your credit limits. If you go over your credit limit, the issuer may charge a fee and increase your interest rate to a higher penalty rate.
- Avoid extra fees. You can be assessed significant fees for cash advances, transferring balances, having a payment returned, or even for paying over the phone. Read your credit card agreement and know what fees your credit card company charges.
- No cash advances – ever. Don’t use the credit card’s cash advance. The interest rates may be low for a few months, but when that time is up the interest rates will likely be 20 percent or more.
- Watch for changes in the terms of your credit card. The law allows credit card companies to modify the terms and conditions of your credit card, including interest rates. Look carefully at each bill and read all notices you receive from the lender.
Once you have a card that fits your business, keep it and use it. A card that shows a history of regular payments will definitely improve your credit rating.
Understanding credit scores
Lenders use your FICO credit scores to determine if you are a good risk, how much they will lend you and what interest rates they’ll charge. The higher the credit score, the lower the risk. You actually have three FICO scores, one for each credit bureau: Experian, TransUnion and Equifax. Although FICO scores are not the only credit bureau scores, they are by far the most commonly used.
The credit bureaus calculate your scores using: your payment history, the amount you owe, how much of your available credit you use, and the difference between your income and debts. As these change, your credit scores change as well.
To determine your FICO score, each of the credit bureaus must have a record of at least one account for you that has been open at least six months and one account that has been updated in the past six months. This ensures that there is enough information – and enough recent information – in your report on which to base a FICO score on each report.
–By Carlos V. Uribe