How Business Credit Cards Affect Your Personal Credit

If you operate a small business and are thinking about getting a small business credit card, you may have wondered if a business credit card will affect your personal credit history. The short answer is it can, but only if you don’t handle the account responsibly. For a more detailed explanation, read on.

Business card actions that impact personal credit

In most cases, it’s likely that business credit cards won’t show up on your personal credit report, said Elaine Pofeldt, a personal finance expert and author of the book “The Million-Dollar, One-Person Business.” That’s as long as your payments are on time. If you fall behind, it’s a different story.

“Usually, it will only affect your personal credit if you become seriously overdue,” she said.

So what is a seriously overdue payment? Pofeldt said referring to a situation such as being two months overdue, not necessarily missing the due date by a couple days.

It’s worth noting that while personal credit is tracked by three major credit bureaus — Equifax, Experian and TransUnion — things aren’t quite as simple with business credit. There are a variety of agencies that track business credit. An important one is Dun & Bradstreet. But before Dun & Bradstreet will track your credit history, you’ll need to sign up.

“You need a Dun’s credit profile,” said Krista Tuomi, a professor at American University and an expert on entrepreneurial finance. “It’s not an onerous [sign-up process].”

Before applying for a small business card, ask the issuer if the card reports to the consumer credit bureaus. Discover and Capital One business cards, for example, report business card activity to consumer bureaus, while American Express, Wells Fargo, Chase and Citibank do not (although they may report delinquent activity).

Why you may or may not want a small business card to report to consumer bureaus

With some business cards reporting to your personal credit report and others not doing so, how do you know which situation is better?

If a business card reports to the consumer credit bureaus, having an additional line of credit will increase your overall available credit — a good thing for your score. However, it’s only a good thing if you’re keeping your utilization low. If you plan to spend close to your credit limit on your business card regularly, that won’t reflect well on your FICO. You’d be better off with a card that doesn’t report to the bureaus in this case.

Being smart with a business credit card

Just like personal credit, business credit is something you want to build up before you need it.

“You have to start this early,” Pofeldt said. “People [tend to] start looking into this when they really need the credit and it’s hard to quickly resolve this problem.”

Business credit cards can be a great tool for financial record keeping, Tuomi said. But she emphasized that it also means business owners should be cognizant of what they use cards for.

“You should be very careful with whatever you spend on a business card,” Tuomi said. “If you’re ever audited, all of this is going to come up.” That’s why it’s important to keep personal and business expenses separate and not use a business card for personal expenses.

When using a business credit card, you should try to only spend what you’re able to pay for with cash.

“You want to be very disciplined,” Pofeldt said. “If you limit yourself to buying things you can pay for with money coming into the business, you’re less likely to run up debt you can’t pay.”

Responsibility for what’s charged to a business card

The first thing to understand with a small business credit card is that you, the business owner, are ultimately responsible for any debts incurred. While corporate credit cards offer some degree of separation, with the credit card debt guaranteed by the company rather than one particular individual, that’s not the case with small business cards.

“People don’t want to put their personal credit at risk, but it’s virtually impossible [to avoid], based on my research,” said Pofeldt.

Because it’s your personal credit on the line, it’s important to be vigilant.

“With most small business credit card products, the liability is placed on the account holder,” said Patrick Jones, director of corporate affairs and communications for American Express. “Card members are always encouraged to keep their accounts current, regularly request credit reports and make sure creditors are accurately reporting limits and account balances.”

Differences between business and personal cards

It’s important to understand that you have less legal protections when using a business credit card than a personal one. While cardholders using personal cards are protected by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), that’s not the case with business credit cards. So, for example, your business card account might have a sudden change in APR without notice, or a shortened grace period.

There are other differences between personal and business cards that might take first-time business card owners by surprise, too. For instance, the CARD Act capped late fees on personal cards, but there’s no limit on how much a card issuer can charge you for a late fee when using a business card. Plus, there’s no requirement that a business card due date be the same date each month — so you should keep a close eye on this to ensure timely payments.

Yet another difference between personal cards and business cards can be how your payments are applied. The CARD Act stipulates that when a cardholder carries multiple balances with different APRs on a consumer card — such as from a cash advance and a regular purchase — payments above the minimum due must go to the balance with the highest interest rate. That’s not required with business cards, so with some cards, payments will be applied to lower-interest balances first. This increases the length of time it will take to pay off the higher-APR balances.

Some business card issuers, but not all, have voluntarily opted to include protection from the CARD Act on their small business cards. That’s why it’s important to carefully review a card’s terms of service and conditions before applying.

The bottom line

There’s a complex relationship between personal credit and business credit when it comes to small business credit cards. Though some business cards probably won’t show up on your personal credit report, your personal credit is likely a factor issuers will consider when deciding whether to approve you for a business card — at least until you’ve built up a solid business credit history. And if you fall behind on business card payments, that can ding your personal score.

The way to manage a business card is very similar to managing a personal credit card. Pay on time, pay in full and don’t rack up excessive debt. But because business cards have fewer legal protections than personal cards, it’s even more important to follow this good behavior and avoid accruing interest charges or falling behind in payments.

Khary Scott, vice president of business development for Capital One Small Business Card, said that your business credit report is a reflection of your business.

“With some careful attention and monitoring, it can speak to the good reputation you’ve built up and be a valuable tool over the lifetime of your business — it might even have a positive effect on your bottom line as your business grows,” Scott said.