Pros and Cons of Contractor Credit Cards
Business credit cards are among the most common financing options for contractors to pay for everyday expenses. For good reason too. They’re easy to obtain, flexible, and practical.
A contractor credit card is a type of revolving line of credit, usually with lower limits than other financing options. While this can serve as a valuable tool when used responsibly, contractor credit cards come with a set of risks to weigh alongside their benefits.
Let’s examine the pros and cons of having a contractor business credit card, shall we?
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Pros of Contractor Credit Cards
Aside from the obvious of having the flexibility to make purchases today and push back paying until a later date, contractor credit cards offer the following key benefits.
1. Easy Application Process
Unlike bank loans, construction credit cards are easy to apply and get approved for. While credit card providers take your credit history into account when determining factors like your credit limit, the application process is quite simple. This makes them an ideal option for new or budding contractors who need to build their company’s credit history or who don’t yet qualify for a line of credit or bank loan.
2. Spending Flexibility
Contractor credit cards often have limited restrictions from the financial institution. With standard contractor loans, for example, you may be required to use funds for a specific purpose, such as the purchase of equipment. Similar to a contractor line of credit, banks likely won’t restrict where you decide to use the credit card, as long as you are making timely payments and maintaining a reasonable credit utilization. That said, unlike a line of credit, the increased flexibility of contractor credit cards usually comes with a lower spending limit.
3. Rewards Programs and Initial Bonuses
Most credit card providers offer rewards and benefit programs to incentivize spending and differentiate themselves from competitors. These rewards can come in the form of cash back, rewards points, travel miles or insurance discounts. As an additional perk, some providers also give initial bonuses to businesses when they first get the card. And let’s be honest, getting rewards is fun. “Free” flight? Yes, please!
However, don’t be fooled by this. As you’ll see in the “Cons” section below, these “perks” may not be as great as they seem.
4. Method for Building Credit
A construction company’s financial history plays an important role when applying for loans and establishing dedicated lines of credit with lenders. A business credit card can be useful in establishing good credit history to pave the way for future financing options to help grow your business. However, it’s important to note that credit cards are only good for building credit when used responsibly. Carrying a balance greater than 30% of the limit will ultimately have a negative impact on your credit and will end up being counterproductive to building a strong credit history.
Ways to use your credit card to build good credit history include:
- Set up automatic payments to ensure you’re always on-time.
- Use your business credit card to cover small expenses that you can easily pay off in a short period of time.
- Take advantage of expense management tools designed specifically to help contractors stay on top of their credit & finances.
Cons of Contractor Business Credit Cards
Before rushing through the application process and swiping your credit card on every expense, it is imperative to understand the risks associated with business credit cards for contractors.
1. Lower Credit Limits
Credit cards typically kick things off with low credit limits so you have time to build up a repayment history. If you lack credit history or have a weak credit score, you may start out with a credit limit of just a few hundred dollars. Most business credit cards start around $5,000, but that’s still not enough to cover large purchases such as materials or equipment.
2. Easy to Overspend and Hurt Professional Credit
Due to big-ticket material, labor, and equipment expenses, it’s possible for contractors to quickly hit their limit. Additionally, the minimum payment due increases in proportion to the balance on the card. If a contractor runs up the balance during a period of poor cash flow, the minimum payment may exceed what they can readily pay. Situations like this can negatively impact your credit score and slash your credit limits, making it difficult to qualify for loans or lines of credit in the future.
3. Immediate Credit Line Reductions
When you run a business credit card to it’s limit too quickly, it could cause an automatic reduction in your credit limit on other lines of credit you have open. Credit utilization is what causes this, and when your credit utilization increases abruptly, other lenders are notified and may decide to decrease your limits. If you had a big expense coming up, such as material or labor that you wanted to draw on from your line of credit, that available cash may no longer be available. This makes credit cards an unreliable option in many situations.
4. Added Fees from Merchants
Large purchases from a supplier almost always include a 3% credit card “fee” to offset the cost they incur for accepting a credit card. The cost to merchants is a credit card processing fee, and instead of eating that cost, they will usually pass it on to the customer. For example, on a $10,000 purchase, you can expect about a $300 credit card fee, increasing your total purchase to $10,300, making credit cards not ideal for large purchases.
5. Hidden Fees
Additionally, credit card companies often charge hidden fees as additional revenue streams. Paying off your credit cards in full on a monthly basis effectively eliminates any interest expense you would pay to the bank. Therefore, banks can offset that by adding hidden fees along the way.
Potential hidden credit card fees include:
- Balance Transfer Fees: A balance transfer fee is applied when you transfer an overdue balance from one credit card to another.
- Cash Advance Fees: Cash advances may seem like a logical move during periods of poor cash flow, but they come with very expensive fees that increase in proportion to the size of the advance you request. Additionally, cash advances come with either a flat fee upfront, or a percentage of the advance.
- Foreign Transaction Fees: Foreign transaction fees occur when you perform transactions abroad, to cover the conversion cost from foreign currency to U.S. dollars.
- Closure Fees: Lenders can charge a fee for closing an account, which can hurt your credit score. It’s usually better to leave the account open and not use the card.
- Late Fees: Late fees are contracted when the borrower does not pay their bill on time.
- Annual Fees: Annual fees are usually attached to rewards cards and travel cards, and can range in amount depending on the provider.
Understanding when and how these fees are applied is critical to making sure you avoid them.
6. Misleading Rewards Programs
As discussed above, credit card providers often use rewards to make themselves more attractive to potential users. However, there is a catch. The trivial points and benefits do little to offset the 3% fee that you incur on most transactions for using the credit card in the first place. It’s best not to be drawn in by the allure of “free trips” and other perks that you are effectively being charged for, in the form of credit card processing fees.
Best Expenses to Charge on Contractor Credit Cards
A company credit card is a valuable tool in the hands of a responsible contractor. When trying to build your credit history, consider charging these smaller, easy-to-repay expenses:
- Smaller tools
- Office supplies
- Recurring business costs (such as union dues)
- Building permits
- Travel costs and fees
- Utility costs
When it comes to financing larger project expenses, it’s best to explore other options like material purchase financing or contractor bank loans.
Explore Better Alternatives to Credit Cards for Contractors
Although a contractor credit card can be a great tool, they are not an optimal solution for larger expenses such as materials or labor that are a big part of the construction industry. That’s why you may want to consider alternative contractor financing options to complement your business credit card.
At the end of the day, a financing solution uniquely built for large construction purchases is ideal for contractors. Financial partners like Billd not only offer an extensive understanding of the construction industry, they give you the flexibility to pay off what you owe with longer payment terms.
About Billd: At Billd, we provide a payment solution that enables commercial construction contractors to free up cash for material purchases while enjoying the flexibility of 120-day payment terms. You get financing for commercial materials upfront with the freedom to pay it back at your own pace. Learn more about how we can help eliminate your company’s cash-flow problems so you can win more bids and grow your business.Learn More