Small business owners can run into short-term cash flow problems even when business is good — and this means you may end up needing to max out your business credit card. Maxing out a credit card means you use the entire amount of your available credit, called your credit limit. Business owners may also need to max out a card if sales are lagging and you need to cover business expenses. Regardless of why you need to fully use your credit line, it’s important to understand how it will affect your credit scores.
Learn what happens when a business credit card is maxed out, how it affects your credit, and ways to manage your credit utilization in this article from Nav’s experts.
What Happens if You Max Out a Business Credit Card?
Maxing out a credit card means you have made purchases equal to the amount of your credit limit. Let’s say your credit limit is $10,000 for your construction company. If you buy $5,000 worth of supplies and $5,000 of new equipment on the same credit card in a billing period without paying any of it off, you have maxed out that business credit card. You won’t be able to purchase anything else on that card until you pay some (or all) of it off.
Your credit utilization, or how much of your available credit limit you use, is one of the largest factors making up your credit score. Most credit experts recommend that you keep your debt-to-credit ratio below 30% to have the highest score possible (although that’s not a magic number). 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.
Most business credit cards don’t report credit utilization activity to the major consumer credit bureaus. So for most business credit card users, there will be no impact on your personal credit score when you use the majority of your line of credit on your business cards.
How Business Credit Cards Affect Your Personal Credit Score
When you apply for business credit cards, credit card providers look at your personal credit history — and the credit scores derived from it — to decide if you qualify. Credit card companies will do a hard inquiry on your personal credit when you apply, which will likely lower your credit score by a few points for a little while.
After that, most of your activity likely won’t get reported to personal credit bureaus. Your business credit card debt usually only gets reported to commercial credit bureaus. (An exception is Capital One, which reports small business card activity but flags it as “small business” on your personal credit reports.) That means if you max out your card and give yourself a high utilization ratio, personal credit bureaus likely won’t know about it — and your personal credit score won’t go down.
But there is one important outlier: negative information. Business credit cards report cardholders’ negative payment history to personal credit bureaus. So if you miss a monthly payment, even a minimum payment, your credit card provider may send that information to personal credit bureaus. Having these kinds of dings on your personal credit report could lower your FICO score and ruin good credit. Like with a personal credit card, it’s always important to make on-time payments for your business credit cards. For more information on what small business credit card activity is reported to your personal credit history, see this Nav article on business credit cards and personal credit.
How Credit Utilization Affects Your Business Credit Score
When it comes to your business credit scores, 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 of a factor as it is on personal credit reports.
On the other hand, your business card usage may help you build business credit, depending on the card.
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 creditworthiness, and isn’t a large factor in your business credit scores. But it still matters. Most business credit cards require a personal guarantee, which means you are personally responsible for business expenses that the business can’t pay off. Maxing out your business credit cards may mean you’re buying more than your business can afford, even if you’re offered higher credit limits by the card company. Overspending in your business puts your personal finance and savings at risk.
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.
Maxed-Out Business Credit Cards vs. Maxed-Out Business Charge Cards
A standard credit card works differently than a charge card because you have to pay off a charge card in full — you can’t carry the balance over from month to month. Even with a maxed-out business credit card, you can make only the minimum payment and keep the rest as a revolving balance. With a charge card, you’ll have to be able to afford the entire amount on the card at the end of the billing cycle. It’s especially important to be careful about maxing out charge cards for this reason.
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.
Finally, you can look into small business loans to diversify your debt. Small business loans may not have the perks that credit cards offer like cash back or 0% intro APRs, but you can often get lower long-term interest rates. And increasing the variety of debt can boost your credit score, as well.
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.
This article was originally written on September 25, 2017 and updated on February 17, 2023.