Small business owners who are starting out often find it challenging to differentiate their personal credit scores for personal liability and business credit. Although it’s not entirely feasible to keep them entirely separate, having a separate business credit score can be advantageous. It helps you avoid relying on your personal credit score to obtain credit for your business. However, most business credit cards affect personal credit if not managed properly.
Maintaining separate personal and business credit lines is a challenge. Despite some business credit card issuers’ being more cooperative than others, most entrepreneurs will have to use their own personal card and corporate credit card together at some stage.
How does the issuer of a business credit card assess your creditworthiness when you apply? And what happens if an authorized employee overspends, causing you to be unable to make the minimum payment?
If certain criteria and consequences are established, your personal credit report history may be reviewed by creditors.
Can please explain how using business credit cards impacts your personal credit score?
By obtaining a business credit card, you can establish a credit score solely for your business. This score is separate from your personal score and is influenced by factors that affect personal credit such as credit length, debt utilization, and payment history. Business credit scores are public and are graded on a 1-100 scale, unlike personal scores which range from 300-850.
To understand how using business cards affects your credit scores, carefully review each card’s terms and look for information on where your activity will be reported. Keep in mind that some business cards impact both your personal and business credit scores, while others only affect your business score. Using both personal and business finances on cards can affect your personal and business credit reporting agencies’ history in various ways, which we’ll explain.
New credit inquiries
When you apply for your first business card, the lender will likely run a credit check on your personal history and business finances. This means they will look at any borrowing you have done in the past, or if you have never borrowed before, they will rely solely on your personal credit history.
Your credit score may be slightly lowered on your next report due to the hard inquiry. If there are no other major changes to personal credit reports, your score should return to its previous level within six to twelve months once the hard credit inquiry is no longer a factor.
Length of credit history
When you obtain a business card, the card’s age will be added to your personal and/or business credit report. This can have a positive effect on both your personal and business scores because it increases the length of time during which lenders have seen that you have responsibly managed debt. The longer your account has been open and in good standing, the more it helps your credit score.
Credit utilization
To calculate your credit utilization ratio, divide the total amount of credit you’re currently using by the sum of all your available credit limits. For example, if you have three credit cards with a limit of $5,000 each and a total balance of $3,000, your utilization rate would be 20% ($3,000 / $15,000).
How does your credit card company consider your business cards when calculating your personal utilization rate? Some credit card issuers include business cards, while others do not.
It is important to understand the type of business credit card issuer that you have. Business cards typically have higher credit limits, which can greatly affect the calculations mentioned earlier. If you plan on making large purchases on your business card, this may impact your credit utilization rate. It’s recommended to keep your credit utilization below 30% to maintain good credit.
Payment history
Your payment history is vital for a good credit score, as it is with personal credit cards. But, some banks only report negative information to consumer credit bureaus, while others report both on-time and late payments. To understand how and where your payment information is reported, it is essential to check with your credit card company.
Personal guarantees
Most business loans and company credit card providers require small business owners to sign a personal guarantee, which is similar to cosigning for yourself. This guarantee means that if your business fails to pay its debts, you are personally responsible and your lender can go after all of your personal assets, including credit lines.
Most small business credit card agreements require a personal guarantee, but some business credit cards don’t affect personal one. While your personal credit becomes less crucial as your business credit history grows over time, the guarantee will continue to apply.
Issuer policies for business credit cards affect your card activity
It’s not always certain whether your business card information will be reported to the credit bureaus by the card issuer. It’s recommended to reach out to your issuer to confirm their policy on this matter, as it could change unexpectedly.
Should you get a business credit card?
The goal of this message is not to discourage you from applying for a business credit card. On the contrary, getting a business credit card can be highly beneficial for small business owners who want to manage their earn rewards, manage their business and personal expenses, and spread out large payments over the course of time. However, it’s important to remember that your personal and business credit accounts are linked, so it’s crucial to be mindful of this connection.
From a behavioral perspective, having a line of credit for your business will not erase any negative history associated with your personal credit card(s). Your spending habits are reflected in your own personal credit report and history. If you struggle to stay within your own personal credit rating limits, pay off your balances, or reduce your debts, you should carefully consider this before opening a business account.
Having a card with “business” in its name doesn’t make you a different user. If your credit score is at risk, getting a business card may worsen the situation.
Using a business credit card can help business owners establish credit for their growing businesses. A positive business credit score can offer advantages such as easier access to financing, lower insurance rates, and potential investment prospects. It’s important to note that investors may assess your business credit score as well.
The bottom line
If you are considering applying for one of the top small-business credit cards for your growing business, it’s crucial to understand how it could impact your personal finances and credit history. Making timely payments and maintaining consistent credit utilization can help you establish solid business credit while safeguarding your personal credit.
