CHICAGO — Recent developments in our troubled economy have served to dramatize how credit can be a valuable friend or a dreadful foe. Used sensibly, credit can be a powerful asset in your business life. Use it carelessly and it can become your worst enemy.
You may not need to use credit every day, but when you need it, you can’t afford to have the door closed in your face. Here are nine ways to put credit to work for you and your laundry and not against you:
Consolidating Card Balances Is Not a Cure
You’ve seen the advertisements: “Consolidate all your credit cards debts into one low-payment loan and we’ll negotiate with your creditors to reduce your debt.” Don’t believe it.
Once you allow yourself to get into unmanageable debt, there’s no easy way out. Debt consolidation may sound like an easy cure, but many professionals and business owners have discovered that so-called debt consolidation led them down the road to an even more burdensome debt load.
“Consolidating debts may be only digging yourself into a deeper hole,” says certified financial planner Brent A. Neisner. “Before you take that step, you should ask yourself how you got into debt trouble. Overspending almost always involves emotional and psychological issues that aren’t going to go away by treating the symptoms.”
Eliminate Receipt of Pre-approved Offers
Those pre-approved credit offers that find their way into your mailbox represent a temptation for identity thieves who might try to open new credit accounts in your name or the name of your business.
You can opt-out by visiting the official Credit Reporting Industry website or by calling 888-567-8688.
Be Aware of Differences Between Debit and Credit
While there are many similarities between debit and credit cards, the differences can significantly affect the cash flow in your business.
It’s easier to qualify for a debit card than a credit card, because there’s no credit involved. When you use a debit card, you must already have the money in your business account at the bank. Your purchase is debited to your account electronically as soon as you make your purchase.
Using a debit card is almost like using cash. Unlike writing a check, using a debit card saves you from having to show identification when you conduct a transaction. Having a debit card not only frees you from carrying cash, it will be more readily accepted than checks where you aren’t known.
However, debit cards carry their own set of disadvantages that you need to know about. Unlike credit cards, debit cards give you no grace period for paying your bill. The money is deducted from your account immediately each time you use it.
Keeping your account in balance can be a problem. It’s easy to misplace a receipt and forget to notate the transaction in your check register. That can result in overdrawn accounts and financial penalties.
While you get protection from liability due to fraud on both credit card and debit card purchases, debit cards do not offer the same protection as credit cards in the case of defective or unsatisfactory merchandise. With credit cards, you may dispute errors or unauthorized charges and withhold payment until the matter is resolved. With a debit card, your money is irrevocably spent the moment you complete the transaction.
If you pay off your credit card balances in full each month, the last thing you need is a debit card. You’re now enjoying up to 30 days of free use of someone else’s money. This is “using the float,” the period between the purchase date and when the money is actually withdrawn from your account. In this case, you should congratulate yourself on your financial acumen and hang on to those credit cards.
Never Co-mingle Business and Personal Funds
Not only is mixing your business and personal finances an open invitation to problems with the Internal Revenue Service, it complicates your recordkeeping and cash flow management. You should maintain separate business bank accounts and make all of your business credit purchases on a separate business credit card.
Some experts compare unwise use of credit to use of drugs: It can offer short-term pleasure in exchange for long-term pain. Once the “credit monster” gets his hooks in you, it can be painfully difficult—and sometimes impossible—to free yourself.
However, credit in itself is not harmful. Used skillfully, it can be a profitable tool for managing your business affairs. Use these tips to help make credit one of your business assets, not one of your liabilities.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].