Pros and Cons of Opening Another Business Credit Card Account
Generally speaking, though, if you’ve been responsible with the business credit card(s) you already have, opening another account should be a net benefit to your business. If you’re still on the fence, here are the pros and cons of opening another business credit card account.
Improve Your Credit Utilization Ratio
Your credit utilization ratio is the proportion of credit you’ve used (your current balance) divided by your credit limit. Keeping this number low is important for you to maintain a strong business and personal credit history because this ratio is used by the credit bureaus to calculate your scores. By opening another business credit card account, you increase the amount of credit available to you, thereby lowering your credit utilization ratio.
For example, let’s say you have one business credit card with a $10,000 limit and you’re carrying a $5000 balance. That’s a credit utilization ratio of 50 percent; the general rule of thumb is to keep the ratio below 30 percent. If you add another card with the same limit as your first card, you would have $20,000 in available credit, which means your credit utilization ratio would go down to 25 percent.
Of course, this only works in your favor if you don’t plan on carrying a large balance on your new business credit card.
Access More (and Better) Rewards
As a business owner, you may have to cover expenses for office supplies, travel, marketing, and much more. Since the most lucrative credit card rewards are usually concentrated on a certain category of spending, it’s impossible to maximize your rewards potential with just one card.
For example, if you already have a business credit card with great travel rewards, you might benefit from a card that offers rewards on office supplies. By having both cards, you get the best of both worlds and can use the different cards to maximize your rewards.
Extra Short-term Financing
In addition to improving your business credit score, a new account also improves your ability to access short-term financing. By opening another account, you give yourself additional credit so you can pay for things that you don’t have cash on hand for. As long as you stay disciplined and don’t overextend yourself, extra credit may be just what you need to smooth out bumpy cash flow.
Risk of Over-extension
In a study by M.I.T., test subjects were willing to pay twice as much for the same tickets when they were given the option to pay with a credit card versus cash. This phenomenon has been reproduced in multiple studies over the years. So, what’s the takeaway?
The easier your access to credit cards, the more likely you are to spend. Moreover, opening another business credit card account may increase your incentive to spend because of the potential for rewards. If you can stay disciplined, this isn’t an issue, but it’s definitely a downside to be aware of.
Another Card to Deal With
When you open a new business credit card account, you’ll be faced with more monthly statements to review and another payment date to remember. It’s a minor annoyance at best, and another business liability at worst. Fortunately, you can work around this by setting up automatic payments and connecting your new business credit card account to your banking account.
Still, it’s a good habit to review your statements for errors each month, and you’ll have to deal with that at the very least.
Business Credit Cards Can Hurt Your Personal Credit Score
While not all business credit card providers will report information to the major credit bureaus, some will. Therefore, if your business account becomes delinquent, the provider is more likely to report that information, which will impact your personal credit score.
In the event that your provider reports business credit information, this could hurt your personal credit history even if your account isn’t delinquent. For example, part of the credit bureaus’ calculations are based on the average age of your credit card accounts. When you open a brand new business account, and it’s reported to the credit bureau, the average age of your accounts goes down, and your credit score may go down as well.
The decision to open another business credit card account boils down to two factors. The first factor is the likelihood that you’ll overspend with a new card. The second factor is the potential benefit of additional rewards and a more robust credit history. If you feel confident that you can remain disciplined enough to reap the rewards of another business credit card, opening a new account may be the way to go.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.