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As a small business owner, it makes sense to keep your personal finances separate from those of your business. The same rule also applies to your credit reports. Whenever your business needs to borrow money, it’s best to do so on behalf of the business and keep your personal credit outside of it.
Yet most business financing options, such as business credit cards, come with the requirement of a personal guarantee. According to the Federal Deposit Insurance Corporation (FDIC), 96% of large banks and 86% of small banks value personal guarantees when small businesses apply to borrow money.
You can work hard to separate your personal and business credit, but a personal guarantee can confuse things in some situations. Here’s a breakdown of when a business credit card can hurt your personal credit rating, and some tips on how to avoid that problem.
Personal guarantee explained
Accepting a personal guarantee on a credit card or business loan essentially makes you a co-signer in your business. In the event that your business does not repay the lender as promised, that lender can sue you personally to seek repayment of the debt. This personal promise is the lender’s way of reducing risk when lending money to a business.
Part of a personal guarantee may also include language that allows the lender to report account details to staff. credit reporting agencies—Equifax, TransUnion and Experian. This is where the potential for personal credit score damage comes in with a business credit card.
Many lenders will only report a business account to personal credit bureaus if something is wrong (such as late payments or default). However, some small business credit card issuers choose to report business credit cards to business credit bureaus and personal credit bureaus on a monthly basis.
Business credit cards and your personal credit
Business credit cards can have a positive or negative impact on your credit, just like any other type of financing. But whether or not the account has an effect on your credit depends on a few important factors.
- Will the business credit card issuer check your personal credit report?
- Does the account appear on your credit report?
- Did you pay your business credit card late?
- What is the credit usage rate on your business credit card?
Let’s take a closer look at each of these four questions.
1. Will the business credit card issuer check your personal credit report?
In most cases, a card issuer will check your personal credit report and score when you apply for a new business credit card. When this happens, a firm credit check will appear on the credit report verified by the card issuer and the file will remain there for two years.
Serious requests can impact your FICO® score for up to 12 months. However, inquiries usually do not carry much weight when it comes to calculating credit score, especially when compared to larger inquiries. credit score factorIt’s like payment history. A good rule of thumb with difficult inquiries is this: You shouldn’t be afraid to apply for new credit when you need it as long as you are excessively seeking new credit.
2. Does the account appear on your credit report?
Many commercial credit card issuers report to one or more commercial credit reporting agencies each month—Dun & Bradstreet, Equifax and Experian. This practice could help your business establish business credit.
A few business credit card issuers also send monthly updates to personal credit reporting agencies. If your business credit card issuer has this policy, it means the account could appear on your personal credit report alongside your other current business lines. And if the business credit card is on any of your personal credit reports, it will impact your personal credit scores.
Depending on your situation, you might consider the presence of a business credit card on your personal credit as positive or negative. On a positive note, the account could help you build a better personal credit rating. As you’re still on time and the account ages, that positive impact might get stronger.
However, if your business account has a negative payment history (e.g. The same could be true if your business maintains a high balance on the account over its credit limit. We will cover each of these scenarios in more detail. below.
3. Did you pay your business credit card late?
Most business card issuers only report the business owner’s personal credit reports if something goes wrong. So if your business is late or defaults on their account, there is a very real risk that the business credit card will show up on your credit report at that time. If this happens, the negative account could hurt your personal credit score and possibly set off a chain reaction of other issues.
Late payments can be a serious problem when it comes to credit scores. And if your card issuer reports that you paid late to both commercial and consumer credit bureaus, the derogatory marks could damage both sets of credit scores.
On the consumer side, late payments can stay on your credit report for up to seven years. Payment history is also worth 35% of your FICO score. So when you are 30 days or more overdue on your payment, you are taking a big risk.
Bad credit scores and a history of late payments can also make it difficult for you to borrow money again in the future. You may have fewer financing options available, and lenders who are willing to work with you are likely to offer higher interest rates and less attractive loan terms. As a business owner, it could also affect your business’s ability to qualify for new financing.
4. What is the credit usage rate on your business credit card?
If a business credit card appears on your personal credit report, that account’s balance will also appear. Credit scoring models, such as FICO and VantageScore, will take into account the balance / limit ratio of these accounts, also known as your credit utilization rate.
A high credit utilization rate is not good for your personal credit score. (It’s also not good for some business credit scores, like FICO SBSS, for that matter.) On the flip side, if your business credit card doesn’t show up on your credit report personal, its usage rate will not affect your personal score at all.
What business credit card issuers report to consumer credit bureaus?
Wondering if a business credit card will show up on your personal credit report. You can contact the card issuer to receive the most recent information on their credit report policy. In the meantime, here’s a useful cheat sheet.
* Capital One used to report all business credit card activity to consumer credit bureaus. As of October 2020, the bank no longer reports credit activity to consumer credit bureaus for its Capital One Spark Cash for Business credit card customers.
Is a business credit card right for you?
There is a lot of reasons to consider opening a business credit card. Here are some of the benefits offered by business credit cards.
Business credit cards can:
- Help you build a good credit rating for your business. Building good business credit could save your business money and make borrowing money easier in the future.
- Separate your personal and business finances. The separation of personal and business expenses facilitates accounting and tax preparation.
- Improve the cash flow of your business. With a business credit card Grace period, you have the option of using your line of credit as a kind of interest free loan. Just make sure you pay the full statement balance before the due date if you want to avoid paying expensive interest charges.
- Treat yourself to valuable rewards. One of the most enjoyable benefits of a business credit card comes in the form of rewards. If you open a business rewards credit card, you may be able to earn miles, points, or cash back on your daily business purchases.
Best Business Credit Cards 2021
Find the best business card for you and identify the important factors for your business
Many people are eligible for business credit cards, even startups and those who do not own traditional businesses. Being self-employed or running a side business may even allow you to open a business credit card with some card issuers.
If you’re ready to open a business credit card, it’s always a good idea to start with some research. You can compare available offers to find the best deals available and try to match the benefits of rewards with your business’ spending habits.
Don’t forget to review your credit reports from the three credit bureaus before you apply, and maybe your scores as well. Checking your credit does several things. This can help you make sure that the information on your reports is correct. And when you know where your credit is, you’ll be in a better position to choose the business credit cards you’re most likely to qualify for today.