By Michael Barth, Ph.D.
Citadel Professor of Business
If the average starting small business owner is aware that they are entitled to a free credit report each year, they should also know that they are entitled to dispute the information found in their credit report. Small business owners should closely review their credit reports before selecting a business credit card. Too often, though, individuals do not take advantage of the free credit report offers from the major credit reporting bureaus or the information found in online sites like Credit Karma. And far too often, people starting a small business may not be aware of anomalies or errors in their credit reports until they apply for, and are denied, credit.
The biggest impediment people face in filing a dispute is personal inertia. When consumers note an error and report it, they tend to accept the credit bureaus’ answers at face value. The credit bureau relies on the creditor, and if the creditor supplies bad information, the credit bureau does not follow up. Consumers must show some initiative to actually get the dispute resolved.
Be assertive when disputing items on your credit report
People tend to be overly hesitant to dispute items and don’t always follow up as enthusiastically as they could. The FTC released a study in February of 2013 that reported that 25 percent of consumers had a disputable error on at least one of the three major credit reports (Equifax, Transunion, and Experian) and that five percent of consumers had “errors on one of their three major credit reports that could lead to them paying more for products such as auto loans and insurance.” While most errors were relatively minor, there were some errors that made major differences in credit scores.
In a follow-up study released in January 2015, the FTC reported on the outcomes of 121 consumers that had unresolved disputes with their credit reports. Of this group, 70 percent continued to dispute the information in the report. About half of those had given up on trying to get the information corrected.
Here are some key points about monitoring credit reports:
Consumers should take advantage of the opportunity to review their credit reports for accuracy each year.
When disputing information, consumers should do so in writing and should contact both the credit reporting agency and the institution that supplied the erroneous information.
Consumers should file their disputes through the mail rather than using the online dispute resolution apps because the written dispute will carry more weight.
The error rate is simply a factor of life. There are so many transactions these days, there are bound to be errors. The credit bureaus rely on the creditors that supply the information for ensuring its accuracy, but the simple fact is that errors do occur and there is relatively little incentive for the credit bureaus to correct those errors. They defer to the credit suppliers for the information, and some credit suppliers are more conscientious than others.
Selecting a business credit card
When the credit report has been reviewed and any necessary corrections are in place, it is time for the new small business owner to select a business credit card. The best cards all feature favorable balance transfer options, low fees, high limits, reward options (e.g., cash back offers, airline miles, free hotel nights, or reward points), and premium services. The optimal package of these features, and the overall cost, differs from business to business.
All business credit cards offer a convenient way of financing short-term business expenses at an affordable cost. After that, the differences outweigh the similarities. For example, one card may feature a low interest rate but very restrictive underwriting, meaning that only applicants with excellent credit will be accepted. If your credit is less than stellar, then that card would not be the best choice. Similarly, if a small business prefers cash back to air miles credits, then a business card with a great frequent flyer program would be suboptimal compared to a different card with modest cash back features. The market for business credit cards is highly competitive and the various credit suppliers tailor the features of their cards to meet these diverse preferences.
The best card is the one that meets the needs of the credit card holder, and those needs are different from one organization to the next. The wants and needs of a business with five employees differ from the wants and needs of a business with 250 employees. Regardless of the bells and whistles offered, the credit card company has to earn a profit. The more perks or rewards included on the card, the higher the cost to the credit card company. They build those costs into the program somewhere, so cardholders should be selective when choosing cards and should focus on those cards that offer terms and services that are most valuable to the business.
I suggest sitting down with a blank sheet of paper and clearly spelling out what features are truly important to your business.
If you plan to pay off the card every single month without fail, then the interest rate should not be that important to you. You may also want to consider charge cards rather than credit cards if that is the case.
If you anticipate carrying a credit card balance at any time during the year, then the interest rate should be a consideration. Rates differ from card to card, and some cards with low rates may make up the profit difference by charging higher fees. In addition, you should pay attention to the mechanics of the billing cycle to minimize the interest charges.
While charge cards typically carry annual fees, they may have other benefits that may more than make up for the annual fee. For example, some cards offer complimentary access to airport lounges or other travel perks. The additional fee may be more than offset by the increased productivity of the card user, especially one that travels extensively.
Credit limits are an important consideration for some cardholders. The higher the limit, all else held constant, the more favorable the impact on the business’s credit score. If your business purchases average $5,000 per month, then a limit of $15,000 is better than a limit of $10,000 because your utilization is 33 percent in the first instance versus 50 percent in the second instance. The percentage of credit being used is a consideration in calculating a business’s credit score.
Over-the-limit fees and late fees may be important for some businesses and completely irrelevant to others. If those fees matter to your business, then consider them in your analysis.
Does the card issuer require a personal guaranty for the business card? What are the credit score requirements? The more restrictive the underwriting, the lower the price, all else held constant.
Are cashback rewards more of an incentive than reward points or airline miles? Reward points are good, but cashback is more flexible. There may also be some types of cashback offers that offer greater utility to one business than another. I rarely travel by air, so even the most generous air miles card feature has little utility for me, but I can always use the cash rewards.
Sign-up bonuses should be considered when evaluating business cards, but glossy sign-up bonuses do not make up for low quality ongoing reward programs. The sign-up bonuses are just one consideration, but should be part of the evaluation.
Read carefully through the fine print of any introductory offers to ensure that you understand how the rewards system works.
Once you have identified the features that are important to your business situation, use the internet to identify the deals that best match your preferences. There are multiple websites that can make a side-by-side direct comparison between multiple cards. If you have already done your homework and have a good feel for the features that are important to you, then the comparison sites can help you to zoom in on the card or cards that best suit your business needs.
Michael Barth, Ph.D., is a member of faculty in the Tommy and Victoria Baker School of Business at The Citadel. He specializes in finance and quantitative analysis, and his research interest is financial risk measurement, evaluation of insurer operations, and regulatory policy.