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Can Small Business Credit Cards Hurt Your Personal Credit?

There are many reasons why a business credit card can be invaluable for small business owners. Besides building commercial credit and earning rewards for office supplies it can also make cash flow easier to manage and allows them to put expenses on credit that can be paid later when they are paid by their customers. 

No doubt business credit cards offer rewards and benefits that are more suited to the needs of small companies, but how does its use affect your credit scores?

The answer is not just a simple “yes” or “no.” It depends on your provider’s policies and how you use it. So before you apply for a small business credit card it is important to know how it can affect your personal credit and how you can meet your goals. 

1. Application

If you do not own a successful business you will most likely have to apply for a small business credit card. When you apply for this type of card the card issuer will check your credit score and credit history. It will run what is called a hard inquiry on your credit report. This will knock about five points off your credit score according to FICO.com. , and can also lower the chances of your application getting approved.

 Most importantly, almost all small business credit cards are backed up by a personal guarantee which makes you take personal responsibility for any debts the business cannot pay. These debts will likely appear on your credit reports and severely damage your personal credit scores.

2. Ongoing Reporting

Some business credit card issuers report only commercial credit bureaus, and not to consumer credit bureaus. There are few other credit card issuers who do not report monthly payments at all. If you are a small-business owner you can choose a credit card that does not regularly report your account activity to consumer bureaus and so will not make a difference to your score but if you do so you need to avoid missing payments.

Assuming that you have a credit card that regularly reports your personal credit, then once your card is approved the new account will affect your credit history and lower the age of your lines of credit. If you have a very limited history this will cause a small drop in your score. 

This new account can also help you build your credit history because your payments and balances on this new account will appear on your credit report as well. This is good for your credit score. So, your use of credit card accounts may or may not affect your credit score in one way or another.

But you should not make the mistake of thinking that you are not personally liable for the debt on your card because all small-business cardholders have to sign a personal guarantee on almost all small-business card agreements as already mentioned above. So, if the issuer sends the accounts to collections or sues you for balance amounts, it will probably turn up on your credit reports. To make sure if your credit card issuers are reporting your payments and balances or not you can check your credit reports each year from the three major credit card bureaus (Equifax, Experian, and TransUnion)

3. Always pay on time and in full

You must always make minimum payments on your business credit card each month. If you miss a payment either by mistake or because your business is struggling it will impact your payment history. This is very important because your payment history makes up 35% of your FICO credit score. One or two late payments can also trigger a penalty APR on your card and could make it harder to stay on top of payments in the future. 

As a business owner, you must weigh your company’s cash flow and your goal should be to pay your bills completely and not just make minimum payments. This will not only save a lot of interest but if they are not paid for a long time it can greatly damage your scores. 

4. Credit utilization

One of the ways that may affect business owners most is carrying too much debt on their business credit card as it raises their credit utilization ratio or a debt-to-credit ratio (the total amount of debt divided by the total amount of credit you have available). Both personal and business credit card balances are combined to calculate the credit utilization ratio which makes up 30% of your FICO score.

Business credit cards usually tend to have higher credit limits than a personal card and can raise your amount of available credit, but you should not quickly max out the business card as it will definitely hurt your debt-to-credit ratio. By limiting how often you use your credit card each month or by multiple payments every month you can keep your balance low and keep the credit utilization score below 30%. So having a new line of credit may or may not reduce your credit utilization ratio.

5. Use small business loans for larger capital needs.

Business cards are no doubt a great way to finance operational expenses but if you need a larger capital to expand the business you should consider using a small business loan instead of business credit cards. You will have the flexibility to use your credit card for your everyday business expenses without the fear of spoiling your credit utilization. Besides, you may also qualify for a lower interest rate than what is available on your credit card depending on your credit history and your company’s financial situation. 

There are many benefits of using a small business credit card including separating your personal affairs from those of your business. But when it comes to your credit score it is almost impossible to have a complete separation as it has the same impact as a personal credit card.