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- Business cards can have an effect on both personal and business credit scores, though not always.
- Some issuers factor your business card use into your personal utilization rate, payment history or new credit inquiries.
- Most business card providers require small business owners to sign a personal guarantee, which means you — and your personal credit score — are on the hook.
The intersection of personal and business credit is a curious one — particularly for small business owners who are just getting off the ground. Before opening a business credit card, many business owners may wonder, “Does a business credit card affect my personal credit?” The fact is, total separation between your business and personal credit score is wishful thinking.
The specific ways your business credit cards interact with your personal credit vary — depending on factors like your card issuer, payment history and other financial habits. Here’s how your business credit card use can affect your personal credit score.
How do business credit cards affect your personal credit?
From the moment you open a business credit card, you can start building your business credit — a separate score unique to your business accounts. Much like your personal score, your business credit score rises and falls according to your length of credit history, credit utilization, payment history and other factors determined by the business credit rating agencies. Unlike personal scores, however, business scores can be accessed by anybody without the consent of the business. The way the scores are graded also differ, with business scores reported on a 1-to-100 scale while personal scores fall between 300 and 850.
But how does business credit affect personal credit? Certain activities from some business cards affect both personal and business credit scores, while others will influence your business score alone. Additionally, business credit cards can appear on your personal credit report. This makes it important to comb through the details of every business card agreement. That way, you’ll know where your activity will be reported and how much influence it might have on your personal credit.
New credit inquiries
Applying for your first business card often requires a hard inquiry into your personal credit history. With nowhere else to draw from, potential lenders may look at anything you’ve used to prove yourself as a worthy (or unworthy) borrower — personal credit being the most obvious case.
Since hard inquiries are known to put a small dent in your credit score, expect a slight dip on your next credit report. As long as nothing else changes much, your score should get back to where it was within a year or less — although the hard inquiry could stay on your credit report for up to two years.
Your credit utilization ratio is the total amount of credit you’re putting to use divided by the total amount of available credit you have across all lines of credit. Say you have three credit cards — each with a $5,000 limit. If you have a $3,000 total balance across those three cards, your utilization rate would be 20 percent utilization rate ($3,000 / $15,000).
Why is that relevant to your business cards? It’s because some issuers factor your business card into your personal utilization rate, while others don’t.
Make sure you know what you’re dealing with. Business cards with higher limits can more heavily influence the math that goes into your utilization rate. If you’re putting large expenditures on your business card — and your business card issuer reports to your consumer profile — it could throw off your rate. A rule of thumb is to keep your credit utilization below 30 percent.
Much like with a personal credit card, your payment history is arguably the most important contributing factor to a strong business credit score. However, not all banks report both on-time and late payments to the credit bureaus. While some issuers will report that information, others only report negative information. Check with your credit card company to understand how and where they report your business payment information.
For small businesses, providers will make you sign a personal guarantee for a business card, which is roughly like cosigning for yourself. A personal guarantee promises that if you fail to pay your debts on your business card, you — as an individual — are still on the hook. That gives your lender the right to go after your personal assets — all credit lines included.
You can find a few business credit cards with no personal guarantee. As time goes on and your business builds a credit history of its own, your personal credit may become less important. However, the guarantee may still remain.
Issuer policies for business credit card activity
Whether an issuer reports your business card information to the credit bureaus varies. It’s best to confirm with your issuer as policies can change at any time, but here is where major issuers stand.
|Issuer||Activity reported to commercial credit bureaus||Activity reported to consumer bureaus|
|American Express||Yes||Yes — but only negative information|
|Bank of America||Yes||No|
|Chase||Yes||Yes, if the account is delinquent|
|U.S. Bank||Yes||Yes, if the account is delinquent|
Should you get a business credit card?
None of the information above is intended to scare you off from applying for a business credit card — quite the opposite. Choosing a business credit card is a great option for small business owners who are looking to spread their large purchases out over time, cover costs during seasons of low cash flow and even earn rewards on guaranteed expenses. More than anything, this is a reminder to stay aware of how closely intertwined your personal and business credit accounts truly are.
From a behavioral standpoint, a business credit card won’t absolve you of any negative credit history you may have with your personal cards. Your spending habits are part of your credit record. If you’re struggling to stay within your limits, pay your balances, shave down your debts or your personal credit score is in jeopardy, a business card could only compound matters.
On the other hand, a business credit card can be a valuable tool for business owners wanting to build credit for their growing business. A strong business credit score can mean easier access to financing, lower insurance rates and even business investment opportunities. Remember, investors can also access your business credit score.
The bottom line
If you decide applying for one of the best small-business credit cards is the right step for your growing business, it’s important to understand how that may affect your personal credit history. By prioritizing on-time payments and steady credit utilization, you’ll be on your way to building strong business credit while protecting your personal credit at the same time.