The Freelance Creative

Extra Credit: The Pros and Cons of Business Credit Cards for Freelancers

Many financially insecure people—including freelancers—have a healthy fear of credit cards. Given that our first experience with financial institutions often comes with the Trojan Horse known as the student loan, that fear is coupled with visceral disgust. If you’re already dealing with debt from school, why would you weigh yourself down with more baggage?

Despite the obvious risks, credit cards, especially business cards, can be powerful tools in the Carpal-tunneled hands of the freelancer. If you qualify for a card, the only extra step you need to take is to set up a sole proprietorship, which is relatively cheap and easy to do, although the costs and application processes vary by state. But as with most powerful tools, using one without understanding the complexities can lead to problems.

If you’ve ever been curious about signing up for a business credit card, we’re here to go over how it could potentially impact your freelance financials.

But why business credit?

For freelancers, business card cards can help manage the financial lag many of us face while waiting for invoices to process. Plus, business credit cards are like little plastic accountants, eager to save you money and make your tax-filing easier. Several companies that issue business cards will keep track of your expenses by category and make them accessible in quarterly or annual formats. This record-keeping makes it easier both to calculate and validate your legitimate tax write-offs for computer equipment, office supplies, and auto expenses, and it can prevent potential bad blood with your real-life accountant.

Many business credit cards also offer reward schemes that, as Points on the Dollar found, are actually worthwhile. For example, Chase’s cards, the Ink Bold and Ink Plus, earn multiplied reward points for certain purchases related to phone, cable, and Internet service. Because these purchases count as tax-deductible expenses, the combination of reward points and tax write-offs can be economically beneficial if you’re able to pay off the monthly balance.

Furthermore, while you’re still liable for business card debt, said debt often won’t show up on your personal credit report. I say often because not all business credit cards have the same terms, but I would recommend only choosing from cards that don’t report. In my experience, Bank of America’s business cards don’t show up on personal credit reports, and according to Points On The Dollar, neither do American Express Business Gold and Chase Ink Bold.

And as Elaine Pofeldt points out on CreditCards.com: “Experts say that if you’ve formed an limited liability company or LLC, keeping your business expenses separate from your personal ones can help you to keep your personal assets—such as your house—protected if you are ever sued. Having a credit card with your business’s name on it provides proof that you operate the company separately from your individual finances.”

The last temptation of credit

Although I’m touting the benefits of business credit, it’s important to remember a fundamental truth: The higher your balance is, the more money the credit card companies make, and the harder it is for you to pay down your debt.

No one business card is optimal for all small businesses. Some cards offer sweet rewards deals only if you charge thousands of dollars in the first three months. If your cash flow is such that you can simply pay $5,000 in one shot, then those rewards make sense. If you run up $5,000 in debt without being able to pay it back, those rewards are offset by the massive interest you’ll have to pay back.

Also beware of cards that incentivize “responsible” card usage. A card like the American Express Plum Card offers 1.5% cash back if you pay your balance early. However, they also charge a $250 annual fee after the first year, which means, as Get.com notes, you need to spend $16,666 annually to break even in the second year. If you just need a card for emergencies and only plan to run up, say, $2,500 annually, that $250 fee is essentially a 10% interest payment on your debt. With the 1.5% cash back, you’re still paying 8.5% interest.

While business credit cards can be helpful, nothing is better than having cash on hand. If your budget allows you to save up to purchase big-ticket items like a new laptop, then great, pay cash. But say your old laptop broke and you need to drop $1,000 on a new computer when you’re short on cash. That’s when knowing the pros and cons of business credit cards becomes essential—and when going plastic is going to benefit you in the long run.

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