Whether you recently opened a business or are looking to expand your current operation, you may be considering a business credit card. Assuming you can qualify for a card with competitive terms, it’s a viable option if you want access to capital on an as-needed basis. But before you apply, you should understand how business credit cards work and the potential impact they will have on your personal credit.
Business Credit Cards vs. Personal Credit Cards: What is the Difference?
Business credit cards and personal credit cards share many similarities. For example, both can be used at brick-and-mortar locations or online to purchase goods and services, and you’ll be required to make at least the minimum monthly payment to keep the card in good standing. Still, there are some key differences to be aware of.
For starters, business credit cards often come with more enticing perks and higher credit limits. But they should generally only be used to make business-related purchases.
Furthermore, business credit card activity is typically only reported to commercial credit bureaus, including Dun & Bradstreet, Equifax Business and Experian Business, as long as the account is current. But if you fall behind on payments, the delinquency may be reported to the consumer credit bureaus – Experian, TransUnion and Equifax. Those late payments will hurt your personal and business credit scores.
Business credit cards also have enhanced federal protections that don’t extend to personal credit cards. Consequently, you may find that the fees on business credit cards are significantly higher.
Is Business Credit Linked to Your Personal Credit?
Business credit and personal credit aren’t the same. They are separate financial products, and spending on one of them won’t impact the credit limit on the other. But as mentioned earlier, your personal credit score profile could be impacted by business credit accounts if the lender or creditor also reports account activity to the consumer credit bureaus or if the accounts become delinquent.
Can a Business Debt Affect Your Personal Credit?
Business debt can affect your personal credit if the lender or creditor reports account activity to the credit bureaus. For example, if you rack up too much debt on your small business credit card and fall behind on payments, you can have a more difficult time qualifying for mortgages, auto loans, and personal loans with competitive rates and terms.
Does Having a Company Credit Card Affect Your Personal Credit?
If you’re an employee, a company credit card can affect your personal credit rating if you’re listed as an authorized user on the account. Authorized users benefit from on-time payments but can lose points on their credit scores due to late payments and a high credit utilization ratio. However, this typically isn’t the case for corporate credit cardholders, even if the credit card company checks your credit profile before issuing a card to you.
How Business Credit Cards May Affect Personal Credit
Even though many business owners keep their personal and business finances separate, some overlap exists. It’s best to minimize this overlap, but a business credit card can affect your personal credit. It’s a good tradeoff due to the perks a business card provides, but it’s important to know how they work. Business credit cards could impact your personal credit for these reasons.
Initial Credit Inquiry When You Apply
Most credit card companies consider your personal credit when you apply for a business credit card. So, a hard inquiry will be generated, which could dip your credit score by a few points. Hard credit inquiries remain on your credit report for up to two years. The impact is temporary, though, and your score will no longer be affected by the hard credit inquiry after one year has passed. A single hard credit check won’t put you in a bad position, but applying for too many business credit cards without getting approved will significantly increase your hard credit inquiries. A higher amount of hard credit checks can have a more meaningful impact on your credit score.
Delinquencies in the Account
It’s also likely that you’ll have to provide a personal guarantee when applying for a business credit card. This means you’ll assume personal responsibility for the balance if you fall behind on the payments. And if the account is delinquent for over 30 days, the credit card issuer may report the late payment on your personal credit report. Those late payment reports could drop your score by several points since payment history is the most significant component of the credit-scoring calculation. Payment history makes up 35% of your score, and falling behind can also hurt your credit utilization ratio, a component that influences 30% of your credit score. In addition, late payments can linger on your credit report for up to seven years.
Since you’re personally responsible for payments your business can’t make, you should be careful with who can access your business credit card. Authorizing the wrong people and providing great people with no training can increase unnecessary expenses. In addition, this outcome can increase your financial stress on a personal level as you repay the business credit card balance with personal funds.
Pros and Cons of Having a Business Credit Card on Your Personal Credit Report
Before applying for a business credit card that could impact your personal credit, consider the benefits and drawbacks to make an informed decision. It’s best to approach any financial product from multiple perspectives.
Increase Your Business Credit Rating
You can build a solid business credit history by using your corporate credit card responsibly, making timely payments and maintaining a low utilization rate. A better business credit score helps you qualify for better loans and save money with lower interest rates. Some small business owners start with secured business credit cards to establish credit and improve their scores over time. However, many credit card issuers have programs that switch you to an unsecured business card with more advantages after demonstrating good payment history.
Great Rewards Programs
Many people use credit cards over debit cards for credit scores and rewards programs. Business credit card issuers provide great rewards for their customers that are often better than personal credit cards. You can get valuable travel and cashback rewards for everyday purchases you already make.
More Time to Pay Business Expenses
Most business owners get financing through small business loans or lines of credit. A business credit card is a line of credit that can improve your score and provide great perks. However, these cards also have a noteworthy advantage over small business loans. You don’t have to pay interest on your card until you borrow against the credit limit. When you borrow against the credit limit, you can still get out of interest payments. If you pay the balance in full each month by the due date, you won’t have to worry about interest payments. Business loans do not provide this option. You have to start paying interest even if you don’t use the funds right away or end up with more loan proceeds than you can spend.
Business Credit Cards Don’t Build Personal Credit
You could pay for business expenses through a personal credit card to build personal credit. Some people prefer to build personal credit because it helps them get better mortgage rates and terms. You can even save on auto loans and utility bills by building personal credit. While business credit cards offer great perks, some small business owners don’t want to miss out on opportunities to improve their personal credit. Business credit card issuers do not report your good payment history to credit bureaus that handle personal credit.
Your Personal Credit Score Can Take a Hit
Many business credit card issuers will make a hard credit inquiry on your personal credit during the application process. This can lower your score by a few points and isn’t too bad as long as you don’t apply for too many business credit cards. However, things can get more problematic if you encounter cash flow issues and fall behind on payments. Under those circumstances, the credit card issuer could report the delinquency on your personal credit profile. This outcome would have a negative impact on your credit score. Remember, if you use a personal guarantee, you are responsible for all business credit card debt, even if a partner or worker mismanages the funds. Therefore, it is a good idea to handle all purchases on your own or only give access to people you can trust.