How I Built $500 in Credit to $500,000
I was raised to believe that debt was bad. If you needed a car, you paid cash. Same went for groceries and clothing and most other things. You paid with paper money or you went without. A credit card was a one-way ticket to insolvency and despair.
It was a mindset of freedom versus serfdom. A healthy mindset, overall -- if maxed-out credit cards and crushing student loans aren’t a form of bondage, I don’t know what is.
When I decided to drop out of school and start my own business, I quickly discovered that there was much more to the story. Debt, while a burden, didn’t have to be ruinous. In fact, it was an outright necessity for any entrepreneur with ambitions loftier than a lemonade stand.
Taking on debt and paying it off is the only way to build a solid credit history. A solid credit history leads to solid credit scores. Solid credit scores mean you’re a trustworthy candidate for financing. And financing, for a business owner, means the difference between a fighting chance and failure.
My total lack of credit history was a huge handicap. I needed a loan to prove I could pay my bills on time, but no one would take the risk because they had zero evidence that I’d paid my bills in the past. It was a thorough pain in the neck, but after much trial and error I got it figured out.
One experience in particular captures the gist of my credit education from the school of hard knocks. My adventures with American Express -- where a $500 credit limit grew to $150,000 before I turned 25 years old -- yields lessons that apply to every type of business financing and can be illustrated in three simple steps:
1. Prepare to start small.
Business credit cards are an awesome way to build a business credit history. All you have to do is keep the balance low, make timely payments, and follow up to ensure your provider is reporting your good behavior to the credit bureaus. Add perks and rewards that can be tailored to meet your business’s needs, the convenience of keeping your personal and business finances separate, and detailed breakdowns of your monthly expenses at no extra cost, and you end up with an invaluable tool that every budding entrepreneur should take advantage of.
It took me a while to comprehend this as a young man, but when I finally did, I applied to American Express. They told me that if I mailed them a check for $500, they would mail me a credit card with a $500 limit.
It was 100 percent collateralized. You could almost call it a fake credit card, because I was borrowing against my own money. As I saw it, a payday loan would have been more respectable, because at least in that scenario I wouldn’t have to fork over the money they were going to lend me.
It didn’t matter. Beggars can’t be choosers, and a start is a start. Keep this in mind as you begin building your own credit history. Something is better than nothing, and if you keep at it, your fortunes will improve.
2. Use your business card a ton and pay it off on time or early.
It was a pain in the butt, but I used that card constantly. I maxed it out and paid it off, maxed it out and paid it off, maxed it out and paid it off, rinse and repeat, month after month.
Slowly but surely, I was proving myself a safe credit risk. I did so through sheer, dogged, mechanical repetition. This principle holds true in every human endeavor. If you want to master something, do it over and over. There are no shortcuts. Think of your business credit card as a guitar -- you’ve got to play it every day just to reach proficiency.
Take maximum of advantage of the tools you’re given. Learn the rewards system and mold it precisely to fit your business’s needs. Stay current with your online statements and keep track of how and when and where you spend. Be deliberate in your purchases -- buy only what will build your business.
3. Be proactive about increasing your borrowing capacity.
Once I was up and running with my $500 credit card, I began a steady campaign of asking American Express to increase the limit. Eventually, they bumped it up to $1000 and then $2,500.
My business expanded accordingly. In six months, it doubled in size. I utilized my $2,500 credit limit exactly as I’d utilized the $500 -- running up the card and paying it off every week. I called American Express repeatedly to give them progress reports -- “Look, my business is exploding, what can I do to expand my credit even further with you guys?”
It was a beautiful day when they finally bumped my limit to $10,000. What was even more beautiful was that they returned my $500 check. It was a humble but significant sign that a major corporation had decided that they didn’t need collateral to back me -- I was worth the risk.
The most beautiful thing of all, though, was that American Express had been reporting my faithful payments to the credit bureaus. It was just one company, and my initial limit of $500 had been pitiful, but that didn’t matter. What mattered was that I had treated that $500 as a precious resource. The credit bureaus didn’t care that my monthly repayments were small; they only cared that they were always on time.
My credit limit with American Express steadily grew from $500 to $150,000 (across several different cards). The fact that I was building a solid credit history along the way meant that I could apply to other lenders with increasing success, and I eventually had a total of $500,000 available to me across a spectrum of business credit cards and lines of credit, all before I was 30 years old.
I realize $500 to $500,000 is a dramatic difference, but the road connecting the two numbers is as plain and straight as can be. Apply for a business credit card, use it aggressively to grow your business, and never, ever miss a payment. Walk this line consistently, and one day you’ll be free to walk in any direction you choose.