Bruce (not his real name) had been operating his pool service business in Arizona for almost seven years when an injury forced him to cut back the number of clients he served. As his income slid, he turned to credit cards to fill the gap. Soon he had maxed out several. Then he missed a payment on one of his business credit cards and the issuer raised his interest rate to almost 27%. By the time he reached out for help, he was deep in debt and he wasn’t sure whether his business could survive another season.
Business credit cards can be one of the safest ways for a business to make purchases. They are safer than business debit cards, for example, which are not covered by federal consumer protection laws in the case of fraudulent purchases. And relatively low interest rates on business credit cards often make them an attractive source of short-term financing.
But fall behind on your credit card payments and you could run into problems. Here’s what you need to know:
First, it’s important to understand the difference between business and personal credit cards. While many business owners use personal credit cards for business purchases, business credit cards are those that are issued to businesses in the name of the business. It’s important to distinguish between personal and business credit cards because personal credit cards are covered by consumer protection laws that generally do not cover business credit cards.
Business credit cards are excluded from the Credit CARD Act, the law that protects consumers against certain credit card “gotchas,” like floating due dates or interest rates that can go up at any time for any reason. Under the Credit CARD Act, if you miss a single payment on your consumer (not business) card, your card issuer can’t raise your rate on your existing balance. Miss two consecutive payments, and they can, but even then they have to give you the chance to rehabilitate your account and restore a lower interest rate.
Also, the CARD Act bans “universal default,” where issuers raise your rate on your existing credit card balance because you are late on another account. Again, that’s prohibited for consumer, not business, accounts.
Some issuers have adopted similar protections for their business credit cards, however. So if you’re about to fall behind on your credit card payments, it’s a good idea to request a copy of your cardholder agreement (or dig out a copy if you saved it) and read the fine print to see whether your issuers may raise your rate on that account if you miss a payment or if you fall behind on other payments. You don’t want to be caught off guard by a sudden spike in your interest rate.
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Most business credit card issuers do not report late payments to the owner’s personal credit reports unless the cardholder is seriously delinquent or defaults. At least one major issuer doesn’t report business credit cards to the owner’s personal credit reports at all. This chart explains how business credit cards report to personal credit.
But even if you happen to have business credit cards that don’t report information to the owner’s personal credit, that doesn’t mean missing payments won’t hurt your credit. Most business credit cards are reported to at least one of the major commercial credit agencies, and, as a result, late payments often hurt your business credit reports and business credit scores.
In fact, with business credit, payment history is by far the most important factor in credit scores and can carry even more weight than it does with personal credit scores. Make sure you monitor both your business and personal credit and understand the repercussions to your credit scores if you fall behind.
If you fall seriously behind on your business credit cards you may have to negotiate new payment arrangements with your creditors. And this can be more challenging when it comes to small business accounts, depending on the creditor’s policies.
“Banks, and the debt collectors they may hire, or even sell your unpaid account to, have largely developed a softer tone and more flexible approach to assisting people in a hardship. But collectors working business credit cards and lines of credit have not necessarily evolved that far yet,” says Michael Bovee, founder of Consumer Recovery Network. “You may need thicker skin and a heightened level of determination when negotiating lower pay offs and settlements on business debts.” You may also have to provide detailed documentation to get significant concessions or lower settlement amounts.
As a general rule, business owners are considered to be more sophisticated and to have greater access to professional advisors such as attorneys and accountants, which is why many consumer protection regulations, such as the Fair Debt Collection Practices Act (debt collection), Fair Credit Reporting Act (credit reports and credit scores) and parts of the Truth in Lending Act (interest rate disclosures, the Credit CARD Act) generally don’t apply to them.
So be smart as a business owner. Business credit cards can be a great way to pay for purchases and protect your personal credit reports from the activity of your business. But if you have trouble making payments be sure to proactively research your options for getting back on track.
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