One of the many benefits of using a small business credit card includes separating your personal affairs from those of your business. But when it comes to your credit, it’s almost impossible to have complete…
One of the many benefits of using a small business credit card includes separating your personal affairs from those of your business. But when it comes to your credit, it’s almost impossible to have complete separation.
Nearly all business credit cards require a personal guarantee, and some will even report your account activity on your personal credit report. Before you apply for a small business credit card, it’s important to know how it can affect your personal credit and what you can do to make the most of the opportunity.
Business Credit Card Personal Guarantees
Business credit card issuers typically don’t require collateral to get approved. As a result, virtually all business credit cards include a personal guarantee agreement.
“You agree to be personally liable for any balances that you incur on the card, and your business is also liable,” says Ben Woolsey, director of marketing for Bulldog Media Group, which owns the personal finance site CreditSoup.
This agreement protects the card issuer if your business fails or doesn’t have the cash flow required to make on-time payments. In other words, you’re effectively co-signing the account. And don’t think you’re protected if you’ve organized your business as a limited liability company or corporation. The personal guarantee agreement overrides any limits of liability you might receive with these classifications. If you do get behind on payments, the card issuer has the right to go after your personal assets for repayment.
You can avoid a personal guarantee by applying for a corporate credit card instead of a small business credit card. Not just any business can get approved for a corporate card, however.
Corporate cards “are typically for much larger businesses,” says Nancy Parnella, director of business cards at Barclays, “and you’re required to provide a lot more financial information about the business.”
In general, issuers require annual revenue north of $4 million to be eligible for a corporate credit card.
Other Ways Business Credit Cards Can Impact Your Personal Credit
Depending on which business credit card you have and how you use it, you may be helping or hurting your personal credit. To avoid the latter, it’s essential to understand at what point your business credit card and personal credit report interact.
Application: Because business credit cards require a personal guarantee, card issuers want to ensure that your personal credit is in good standing. The card issuer will typically ask for a Social Security number and an employer identification number, if applicable.
“The credit card company will run what’s called a hard inquiry on your personal credit report, which has a temporary negative effect on your credit score,” Woolsey says.
For most people, a hard inquiry will knock less than five points off their credit score, according to myFICO.com. That said, having a solid business credit score or financial track record can improve your chances of getting approved for a card, even if your personal credit score is less than stellar.
“We’re looking at the financial stability of a person applying and the business,” says Parnella. “If the business has a very robust financial situation, that will tend to outweigh derogatory information on the personal side.”
Ongoing reporting: Some business credit card issuers report all your account activity on your personal credit report, while others notify the consumer credit bureaus only when you’re behind on payments.
“Most of the time, reporting [business credit card activity] to consumer bureaus is triggered by some action,” says Parnella. “It usually happens with a new account opening, if you go delinquent after a certain amount of time or if the credit card company has charged off the account.” A charge-off occurs when you’re delinquent on your payments long enough that the card issuer has given up collecting on the account. For credit cards, that’s 180 days with no minimum payments.
Here’s how some of the top credit card issuers report your business credit card activity:
— American Express: Reports to the consumer credit bureaus only if your account isn’t in good standing.
— Bank of America: Reports to the consumer credit bureaus only if your account is delinquent.
— Barclays: May choose to report to the consumer credit bureaus in certain circumstances.
— Capital One: Reports all business credit card activity to the consumer credit bureaus.
— Chase: Reports to the consumer credit bureaus only if your account is more than 60 days delinquent.
— Citi: Does not report business credit card activity to the consumer credit bureaus.
— Discover: Reports all business credit card activity to the consumer credit bureaus.
— U.S. Bank: Does not report business credit card activity to the consumer credit bureaus.
— Wells Fargo: Does not report business credit card activity to the consumer credit bureaus.
As you shop around for a business credit card, it’s important to know how issuers will report your account activity. If you’re considering a card from an issuer that’s not listed here, reach out to its customer service team to learn about its reporting standards.
Pros and Cons of Having a Business Credit Card on Your Personal Credit Report
Depending on your situation, having a business credit card on your personal credit report can be good or bad for your credit history.
“It’s kind of double-edged sword,” says Woolsey. “If you’re maintaining the account and there are no issues, that can help your credit. But if you have to max out the card to meet business expenses or fall behind on payments, that could negatively impact your credit.”
Using the card regularly and responsibly could be extremely helpful if your personal credit history is limited or in poor condition, for example.
But running up a high balance, as Woolsey notes, could affect your overall credit utilization — your combined credit card balances divided by your combined credit limits — which make up 30 percent of your FICO credit score. And if you miss a payment by mistake or because your business is struggling, it could impact your payment history, which is the most influential factor in your FICO credit score. The longer a credit card bill goes unpaid, the more it can damage your credit score.
How to Make a Business Credit Card Helpful for Your Personal Credit
If you choose a business credit card that doesn’t report your activity to the consumer credit bureaus, all you need to do is avoid missing payments. But if you get a business credit card from an issuer that reports to both the commercial and consumer credit bureaus, it’s important to understand how to avoid harming your personal credit.
Always pay on time and in full. Your payment history makes up 35 percent of your FICO credit score, so it’s crucial that you always make at least the minimum payment on your business credit card each month. Making one or two late payments could also trigger a penalty APR on the credit card, which could make it harder to stay on top of payments in the future.
Instead of focusing on just the minimum payment, make a goal to pay your bill in full each month to avoid interest entirely.
Avoid racking up a high balance each month. Business credit cards typically offer higher credit limits than consumer credit cards. That’s a good thing if your business credit card is listed on your personal credit report because a higher credit limit makes it easier to keep your credit utilization low.
Credit experts recommend keeping your utilization below 30 percent. On a credit card with a $15,000 credit limit, that’s a balance of less than $4,500. There is, however, no hard-and-fast rule. Instead, you should focus on keeping your credit utilization as low as possible.
You can keep your balance low by limiting how often you use your credit card each month or by making multiple payments throughout the month.
Use small business loans for larger capital needs. Business credit cards can be a great way to finance operational expenses. But if you need a large amount of capital to expand your business, consider using a small business loan instead. Depending on your how long you’ve been in business and your company’s financials and credit history, you may qualify for a lower interest rate than what’s available with a credit card.
What’s more, you’ll still have the flexibility to use your credit card for everyday business expenses without the fear of spiking your credit utilization.