You may have heard about these plastic rectangles called credit cards, commonly used for making online purchases to make your dropshipping business easier. Yes, those ones.
Did you know they also protect against fraud and are a fast way to build credit to have other businesses trust you? (Like Paypal and Facebook)
While credit cards make purchases a breeze, they should also be handled carefully so you don't get yourself accidentally into financial debt!
No worries though, this guide will help you understand how:
- Credit cards work and why they're so great to have
- To apply and use one for your ecommerce business
- Help you safely build credit. This will also help you be able to afford the business expenses to take your dropshipping store to the next level!
To start, let’s look at what exactly a credit card is.
What are credit cards?
A credit card is a metal or plastic card which allows you to get into a credit line given by a bank that is issued to the card.
Each time you pay for something with a credit card, you borrow money from the card's bank to cover the purchase. Very important to note: you then need to pay the money back either in full towards the end of the month, or over time.
Yep, there is no free money from credit cards, and you'll eventually have to pay back what you borrowed.
What are the benefits of using a credit card for dropshipping?
Let's take a look at Steve who needs to purchase a high-ticket product from a dropshipping supplier, but he doesn't have the amount to purchase it from his own account.
Instead of waiting days or even weeks for his website's payment process to send the customer’s funds to him, Steve can use a credit card!
Steve's credit limit will be able to cover the cost so the customer can get the product sooner and Steve can get the profit faster. It's a win/win for everyone.
How do credit cards work?
When accepted for a credit card, the bank gives you a credit limit. This is the largest amount of money you can borrow.
Your credit limit will be set based on factors like your income, your other debts, and the credit limits of your other cards if you have some. They make sure the money for the purchase goes into the business and your credit card gets processed accurately.
Whenever your bill comes (averages about a month), you have the option to pay a minimum amount, pay the entire amount in full, or pay some amount in between.
Paying only the smallest each month is ultimately the most expensive option because it'll cost you the most in interest.
Interest is a special percentage of the purchase from the credit line. This comes from the convince of using bank's money. We'll talk a little more about that soon!
Paying in full is the smartest choice; whenever you pay in full every month, you receive a grace period that allows you to stop paying any interest on purchases.
Your credit card bank sends your payments to the credit agencies. These are the businesses that make credit reports.
Your payment history counts for 35% of your credit rating, a three-digit number that says how much of a risk it will be to give you money. (You can learn more about credit ratings here.)
Be aware that you have to pay at least the minimum by the due date each month to avoid late fees and possible harm to your credit score!
However, credit cards aren't the only type of cards, so let's look now at the different types to know which one is best for you:
How do credit cards differ from other cards?
A bank card is connected to your checking account; bank card purchases automatically pull money out of your account. You are using your own money to cover things as opposed to borrowing.
Some debit cards have benefits. Like credit cards, there are the special perks you are given for choosing one bank over another. The difference is, the debit card benefits are reduced versions of credit cards.
An important and scary thing to note is debit cards also have poorer fraud protections, so be careful!
Another type is the pre-paid bank card. These aren't connected to your checking account; instead, you put money on the card, and you may only spend just as much as you have on the pre-paid card.
What's the difference between a pre-paid bank card and a debit card?
The most notable is a pre-paid card can charge more fees than a debit card. They also do offer you some protection, but they do come with limitations.
What exactly is a limitation example?
Well, some pre-paid debit cards do not offer automated teller machine (ATM) access or mobile banking. Also, not all businesses accept these types of cards due to the higher processing fees they charge them.
Now that we know what credit cards are and how they work, let’s look at how they compare from responsible to irresponsible usage.
Using credit cards for dropshipping: The pros & cons
Whenever you tally up the cons and pros of credit cards, a few things are clear. There are various reasons for using a credit card, from the convenience and charge construction, to 0% financing and benefits.
But considering how easy it is to overspend with a credit card, how pricey getting into debt is, and the way that missed payments can hurt your credit rating, there is the reason also to be careful!
We rack up billions of dollars in credit card debt every year. Anytime you are 30+ days late on a payment, it is mentioned on your credit report for seven years!
However, the benefits of credit cards significantly outweigh the disadvantages for many people. You do not even need to make purchases with a credit card to benefit. Just educate yourself on what to do and what not to do, and you will be alright.
The pros of using a credit card
Let's start by taking a look at what the pros are of using a credit card:
1. Credit building
The power of credit cards comes from your credit score. The higher the score, the more the bank will allow you to borrow money, afford a business order, or set up services.
The more you spend and pay off the debt on time, the higher your score will be from credit building - like a video game.
The best part of building credit is that you have proof that you're financially trustworthy and make people feel at ease when working with you!
2. Convenience
You don't typically see people carrying large briefcases of money. That's why the convenience of having a card hold all your money is so convenient.
Not only is a credit card easier to carry, but it is also a whole lot simpler to protect a card than a large sum of cash you have with you.
Knock on wood - if your credit card is stolen or lost, you are not in trouble for any charges you didn't make. You cannot say the same for dollar bills.
3. Grace Period
A grace period is when you have at least 21 days from the time you get your credit card bill every month to pay it.
That means that if you pay the bill in full each month, you have up to 51 days before you need to pay your bank back for the borrowed money! Definitely take advantage of this.
4. Rewards
Who doesn't like rewards? Credit card banks know this, and that's why they offer them.
Whether they are cashback, airline miles, hotel points, or gasoline rebates, lots of credit cards provide rewards. Not only does it help lower the cost of purchases, but it also gives you reasons to keep using their card.
By getting a rewards credit card, you are joining a membership that has special perks, unlike other cards.
Did you know some cards provide discount rates and exclusive access to shows, ball games, and concerts? They can even pay for VIP treatment in airports and resorts, concierge services, and special presents just for using their card!
Rewards credit cards give you something back for each sale you make. In general, these cards need good credit. They come in different types:
1. Cashback cards
These cards give you some of your money back. You can get that money as a check or a deposit into a banking account, or you can use it to up your credit balance.
Airline and resort credit cards give you points or miles you could redeem for free flights or stays with the card's partner airline or hotel.
The way you redeem your rewards on these cards may be subject to constraints. General travel cards give you points that you may use to pay for any travel cost. They're more flexible than branded airline or hotel cards.
2. Store credit cards
These cards reward you for loyalty by giving you discount prices or other benefits for shopping at your bank's business partners.
3. Rewards cards
These cards are amazing for those who pay their bill in full every month. Whenever you have a good standing for paying in full with no missed payments, your interest increases, making you just a little richer!
4. Low-interest cards
These cards don't give you advantages; instead, they have value with a lower interest rate which lowers the payment you owe. Often, these cards will come with a zero percent introductory APR (annual percentage rate) period, giving you time to pay off a huge purchase without interest!
It's important to know you usually need excellent credit to have that reward, so spend wisely and pay it off as much as you can.
5. A balance transfer credit card
This card allows you to move your debt out of another issuer to take benefit of a lower interest rate. Like with low-interest cards, you have to bring your credit score A-game to a high level.
The cons of using a credit card
Yep, some pitfalls can and probably will happen because credit cards aren't perfect. Since you have now seen the pros of using a credit card, let's move on to the cons:
1. Overspending and lending
When we're spending our hard-earned money, it's easy to see just how much we have. With just a physical card, that feeling of how much money we have can go away.
It's kind of like how casinos use chips instead of dollar bills and coins. It helps you not feel as connected to your money when you spend it.
Overspending can happen because you're spending your own money without associating it, so it's easy to get caught up in the convenience of being rewarded now and then have to pay later.
Overspending on your credit line can lead to overdraft fees. These are the fees from when you spent more than what you're allowed. That said, remember what your limit is and never spend more than that in 1 month.
2. Fees
The average credit card charges a yearly fee of about $16, which isn't terrible. It may also be worth paying a yearly fee to get better rewards!
But other fees can add up, and why pay when they can be avoided in the first place? This includes cash advance charges, account overdraft charges, and foreign transaction fees.
3. Fine print
Credit card applications are hard to read. That's because they're trying to protect themselves legally, so the choice of words and grammar is going to be different because of that.
As long as you understand the keywords such as 'increased rates of interest' or 'unexpected fees', you should be able to avoid anything that can prevent you from your financial goals.
4. Vague approval requirements
The credit card banks will tell you the approval is based on your credit history, income, and debt. It can often feel random on their choice, so you're at the mercy of their decision.
A few banks allow you to look for pre-approval before you apply. But other than that, you are pretty much flying blind without much in the way of changing it.
5. Fraud
The biggest scary worst-case scenario is someone having access to your credit card without your consent. Because they don't have to pay it back, the thief can buy whatever they want.
This means your credit score and your financial planning will get destroyed! Although there are ways to reverse some damages, it's still quite the hassle and headache to go through that.
That said, it's important to guard your info and your credit card(s) for errors every month. If you do lose it, it's best to contact your bank immediately to deactivate it, so if someone has it, they cannot use it.
What are the costs of using a credit card for your dropshipping store?
Credit cards can have costs and sometimes even hidden ones that you won't know about until it's time to pay. The good news is that you could avoid nearly all of them with responsible use.
Let's take a look at the ways a credit card costs money:
1. Interest payments
Credit cards may have different rates of interest or APRs (annual percentage rate) for purchases, cash advances, and balance transfers. Whenever you pay in full every month, your purchases don't gain interest.
2. Annual fees
Some cards charge annual fees from around $20 to tens of thousands of dollars! A yearly fee can be well worth paying if the card gives you perks and rewards that make up for the cost.
For some people though, you should not pay a fee just for having the card in your wallet.
3. Late payment fees
Like with all late payments, there is a consequence!
These consequences can be a penalty that can change from each bank, so it's a good thing federal regulations restrict how much late penalties can be.
As of 2018, first-time overdue fees have been capped at $27; fees for a second overdue payment within six months were limited to $38. Late fees also can’t cost more than the smallest payment due.
4. Balance transfer fees
A hidden fee to watch out for is balance transfer credit cards. They charge 3% to 5% of the quantity of debt transferred. A few cards waive the fee whenever you get rid of debt in time.
5. Foreign interchange fee
Did you know that most cards add a surcharge of 1% to 3% on transactions made with non-U.S. retailers? The good news is travel credit cards usually don't charge these fees, and some banks don't bill them on any of their cards.
Now that we know the costs of a credit card, let's take a look at what different credit cards can do for your dropshipping business.
What credit cards can you use for your dropshipping store?
While there are different credit cards, there are also different banks that give these cards to you. No bank is the same and all offer a lot of pros and cons that affect the way you use it for your dropshipping business.
Check out the below to find the credit card branches that are the most popular and are worth checking out.
I will discuss each credit card in the following layout:
- Introduction
- Pros
- Cons
- Pricing
Ready for the list? If so, let's begin:
1. Citi
Citi credit card is most notable for anyone who doesn't want to deal with high-interest payments while avoiding expensive fees.
You will not gain any miles or rewards, but the introductory annual percentage rate (APR) is the industry's longest intro at 0% for 21 months.
Pros
- The most ideal for making big purchases or consolidate debt due to low APR
- No annual fee for joining
- No late fees or penalty APR for the use of your account
- There is a generous 0% Intro APR for only 21 months
Cons
- No rewards or cashback offers
- Foreign transaction fees and balance transfer fees
Pricing
Free to sign up for the first year, $99/yr after that.
2. Discover
The Discover credit card that had advantages that set the competition apart years ago are now standard in the industry.
Most of the benefits come from your credit score, which are large overseas purchases with no transaction fees.
Discover also excels in their customer service as one of the highest response and customer satisfaction scores.
Pros
- You will get 5% money back on rotating purchasing categories
- There is an intro APR rate for purchases and balance transfers
- There will be no foreign transaction fee when making overseas purchases
- You will not receive any annual fees for joining
Cons
- Not every business accepts Discover due to higher processing charges
Pricing
Absolutely free with no recurring fee!
3. Capital One
Capital one credit card has competitive interest savings and a high annual percentage yield for investing. Regardless of what your balance is, you will always receive the same flat fee. It is the most recommended for those with large saving accounts.
Pros
- There is no monthly maintenance fee
- There will be no additional withdrawal fee
- An easy to use and free mobile app available
Cons
- No ATM withdrawals (including from Capital One ATMs)
Pricing
Free to sign up for the first year, $95/yr after that.
4. Bank of America
The Bank of America credit cards are well known due to having the 2nd largest amount of branches and ATMs available.
You will find a mix of well-rounded interest rates and investments without having a strong preference.
The biggest downsides are the fees and low interest-earnings, so you may have to calculate to know if this fits your financial goals.
Pros
- There are a variety of automatic savings programs available
- A generous debit card rewards system based on your purchasing amounts
- A large number of physical locations to have access to
- Easy and free to use mobile app available
Cons
- A $15 monthly fee. This can be removed with at least one direct deposit of $250 each month
- An account with Bank of America will not earn interest
Pricing
Absolutely free with no recurring fee!
5. Wells Fargo
Wells Fargo credit card is a simple and student favorable way of making purchases. Mostly well known for the Everyday Checking account, which is a basic checking account.
This means it is light on extras but is appealing to someone who is searching for a simple way to manage their money. It does use fees for simplicity and is easy to access via the number of branches available.
Pros
- A large number of branches are available for easy access
- An easy and free to use app for mobile devices
- College students can open an account for free
Cons
- Their accounts do not gain interest
- An opening deposit is required
- There will be a monthly maintenance fee due to the amount of accessible ways to use your account.
Pricing
Absolutely free with no recurring fees!
Bonus: Cards for average or bad credit
So, you may have missed a couple of payments or mistook how much money was on your account, and now your credit score has been lowered. It happens, and it's not the end of the world.
The good news is there are credit cards for all credit scores. It is important to note that it is possible to have too low of a score that you will not be given a credit card.
Those with a less-than-good credit are more limited than what good credit scores can bring. Rewards are rarer and rates of interest are greater. Use these cards to improve your credit so that you can qualify for much better offers later down the road.
The best credit card for bad credit scores
For poor credit, your smartest choice is generally a secured credit card. These cards need a security deposit that you can get back after shutting the account or upgrading to a regular, unsecured card.
In the long term, a secured card is less expensive than an unsecured credit card for poor credit. This is so you don't have to deal with high fees.
So, now you know what kind of credit cards are available for your score, let's look at ways to avoid these fees and other pitfalls to make sure they don't happen to you.
5 Tips to correctly use your credit card when dropshipping
As you read in this article, the advantages of using a credit card outweigh the costs.
So, to end this article correctly, we've collected the five best tips so you can use your credit card responsible:
- Pay your bill on time and in full every month
- Keep your balance below 30% of your available credit
- Wait at least six months between credit card applications
- Review your account online weekly to watch spending and prevent fraud
- Keep no-annual-fee credit cards open and active to prevent hurting your credit rating
Conclusion
And there you have it; everything you need to know about using a credit card for your dropshipping store!
As you can see, using a credit card responsibly is an easy and effective means to build up strong credit. You’ll be thankful that you did for whenever you're in a position to borrow in the future.
With the use of a credit card, you can now make big expenses without holding up your customer’s order or worthy investments that can pay themselves in the future.
The greatest strength in ecommerce is understanding your finances to keep your store growing and keep profitability.
Also, if you're looking for a way to accept credit cards on your dropshipping store, check out our other article here which contains the seven best payment gateways.
