Have you ever had to max out your line of credit on your business credit cards? Sometimes this happens as a result of a short term cash flow problem when business is good, while other times it’s the inevitable result of lagging sales. Regardless of why you need to fully utilize your credit line, it’s important to understand how it will affect your credit scores.
How Business Credit Cards Affect Your Personal Credit Score
When you apply for a small business credit card, you are relying on your personal credit history and the credit scores derived from it. Your credit utilization is one of the largest factors on your credit score, and most credit experts recommend that you keep your debt to credit ratio below 30% to have the highest score possible, but that’s not a magic number. Furthermore, it’s important to remember that each month’s credit card statement balance is reported to the credit bureaus as long-term debt, even when you avoid interest charges by paying your balance in full each month.
However, most business credit cards do not report all activity to the major consumer credit bureaus. An exception is Capital One, which reports small business card activity while flagging it as ‘small business’ on your personal credit reports. So for most business credit card users, there will be no impact on their personal credit score when they utilize the majority of their line of credit on their business cards. However, it’s always important to make on-time payments as negative information from your small business credit cards will often be reported to your personal credit history. For more information on what small business credit card activity is reported to your personal credit history, see this post by Nav’s education director Gerri Detweiler.
How Credit Utilization Affects Your Business Credit Score
When it comes to your business credit score, everything works differently. Different lenders may report your debts to some business credit files, but not others. For example, Dun & Bradstreet’s PAYDEX business credit score looks primarily at a company’s payment history, not its debt levels. And with other business credit scoring models, like those from Equifax and Experian, credit utilization isn’t as much as a factor as it is on personal credit reports.
Why You Should Still Control Your Business Credit Card Utilization
It can be a relief to learn that your small business credit card utilization usually won’t affect your personal credit score, and isn’t a large factor in your business credit scores. But, it still matters.
Furthermore, a credit score is just a convenient way for some lenders to assess your overall credit history. Some lenders will still use a manual process to look through your credit history and may take into account your credit utilization when making their decisions.
Ways to Manage Your Business Credit Card Utilization
Thankfully, there are a number of ways for businesses to manage their credit utilization, in order to help their business credit scores.
First, you can try to increase the amount of credit you have available by either requesting a credit increase from your current cards, or by applying for a new credit card. In both cases, your request is more likely to be approved at a time when you happen to have very little credit utilization. As the old saying goes, banks seem to lend money to those who don’t need it.
In addition, you can try to lower the amount of debt that’s reported to the credit bureaus. Since most credit card issuers will only report your account balance that’s recorded on your monthly statement, a simple way to reduce your credit utilization is to pay down your balance just before your monthly statement period ends.
It can be surprising to learn how your business credit card utilization does and does not affect your various credit scores. By understanding the impact of small business credit cards on your credit, you can make the right choices to strengthen your business and personal credit histories.