Having a bad credit score can be a nightmare, especially for the new entrepreneur. Your credit score is made up of five major components. Focusing on each of these components is key to establishing and maintaining a good credit history. These components will affect your FICO score (the score lenders will use to determine your credit risk):
- Payment history (35% of total credit score)
- Credit utilization (30% of total credit score)
- Length of credit history (15% of total credit score)
- New credit accounts (10% of total credit score)
- Mix of credit accounts (10% of total credit score)
But what if my credit score is already damaged, you ask? Did you know it is possible to build and repair your credit score by using a credit card? The following are 4 ways to build credit using a credit card, while also avoiding significant financial mistakes:
- Apply for a Secured Credit Card
A secured credit card can be applied for online or through your local bank. Typically, it will require a deposit of $200-2,000. This deposit is then used as collateral for your spending limit.
Just like a traditional credit card, a secured credit card allows you to swipe when making purchases, and requires that you pay off the balance at the end of the month to avoid interest payments. Even if you are starting from scratch, a secured credit card will help you build your credit score.
- Become an Authorized User
Another option is to ask a family member to become an authorized user on their credit card account. If they have great credit, you will be able to build a good score as an extension of their credit history. Keep in mind that, because your score is intertwined, any bad credit decisions will negatively impact both parties involved.
- Maintain a Low Balance
A huge mistake many people make is maintaining a low balance on their account – their balance-to-credit-limit-ratio. Ideally, it should stay around 30% or less at all times. A great way to effectively manage your secured credit card balance is to make small but regular purchases, review them weekly and schedule frequent payments.
- Use Auto Pay for Your Bills
Another great way to build credit is to simply setup auto pay on your monthly bills. You avoid missing a payment and improve your credit score in the process. Start by setting up your household expenses (e.g. utility, internet, insurance bills, etc.) to be paid automatically each month using your credit card account.
Unfortunately, bad credit seriously affects your ability to secure payment processing and business funding for your business. As a high-risk provider, First American Merchant specializes in working with businesses that have open tax liens, past bankruptcies and damaged credit. Your business can easily secure the payment processing platform and/or working capital it needs – in as little as 24 hours.Get Started Now