Credit tips for entrepreneurs

Ann Chastain, Michigan State University Extension - July 03, 2012

Building a solid credit history is critical when seeking funding from creditors and lenders for your new business venture.

Having a strong credit score makes it much easier to start a new venture. Unfortunately, many people have to delay new business start-ups, due to poor — or nonexistent — credit histories.

Building credit might seem impossible as a young entrepreneur. The more you learn about basic credit management now, the better prepared you’ll be to obtain future business credit. Establishing a solid credit history takes time. Don’t overlook these important steps toward building good credit now.

What are lenders looking for?
Before searching for creditors and lenders, understand what factors they consider when reviewing your application. A number of variables affect your credit score. Yearly earnings, net worth, residency and utilities listed in your name are some factors that indicate your credit worthiness and financial stability. Making rent and utility payments on-time builds your credit history by letting others know that you’re responsible and reliable when it comes to paying bills.

Build experience with department store cards.
We’ve all shopped at stores that ask us to open a store credit card for additional discounts on our purchase. Actually, store credit cards can help you build good credit. Just be sure you make the minimum payment each month. Better yet, pay the bill off quickly with greater than minimum required payment. Otherwise, high interest rates can negate whatever you initially saved. Using a department store card can help you gain basic credit experience as long as you recognize the importance of paying off your debt in a timely matter.

Take advantage of secured credit cards.
A secured card requires you to provide a cash deposit before you can use the card. This becomes your account spending limit. For example, if you deposit $500 into the account, then you can spend up to $500. Similar to regular credit cards, secured cards may have fees attached, so 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.

Manage all credit responsibly.
Once you’ve received a card, manage credit responsibly. Don’t get caught with charging frivolous purchases that you can’t afford. Make sure you can pay off at least part of your credit card debt each month. However, 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. Be sure you get the answers before applying for an overload of cards and loans.

For additional information on this and other issues including community success in the New Economy, placemaking, or community engagement and leadership development, contact Ann Chastain, Michigan State University Extension educator at 231-373-6199, or e-mail chastain@msu.edu.

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