Pros and Cons of Contractor Credit Cards

Published: August 19, 2020
Last updated: September 10, 2021
Read time: 5 minutes

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
  • Uniforms
  • 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.

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Jon Katz Headshot

Jon Katz VP of Marketing

Jon Katz is an experienced marketing executive with a proven record of effectively scaling businesses and generating significant revenue and profit growth. He brings an entrepreneurial spirit, self-starter mentality and passion for life-long learning to his role. At Billd he has developed a passion for the construction industry and the clients he works with. Now he uses his skills to help contractors grow their businesses by providing the tools needed to learn, improve, and network.