If you are looking for a small business credit card, you’ll probably focus on the benefits and rewards you can earn, as well as the annual fee and interest rate you’ll pay. How that card will affect your credit scores probably won’t be top of mind, but it’s worth considering. The way a business credit card reports information to the credit bureaus can help or hurt your personal and business credit ratings.
Will my business credit card activity affect my personal credit?
Most small business credit cards require the business owner/cardholder to personally guarantee the debt. That means that if the balance isn’t paid off through the business, the owner will be on the hook for the entire amount. That also means business account activity may spill over to the owner’s personal credit reports, depending on each card issuer’s policy.
Some card issuers only report activity to the cardholder’s personal credit reports if the owner defaults. Others will report all activity, whether it is positive or negative.
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Pros and cons of business credit cards that do report activity
Which way is better? It depends on your situation. As long as you pay your business card on time and avoid high balances, having a business card that appears on your personal credit reports with Equifax, Experian and TransUnion should not be a problem, and may even help your credit scores.
But if you charge everything you can on your card to rack up rewards, for example, then your personal credit could suffer. Why? Credit scoring models take into account your “debt usage” or “utilization” ratio, which compares the balances reported against available credit limits, often for each card as well as all credit cards totalled together. A high balance on a business card that appears on an individual’s personal credit can mean a high debt usage ratio which can lower credit scores.
(Keep in mind that simply paying the balance off in full each month alone isn’t likely to solve this problem. The balance that is reported is usually the balance as of the statement closing date, not after a payment has been made. If you want lower balances to be reported, you need to make your payments before the statement closing date, or whatever date the issuer reports.)
On the other hand, if your personal credit history is a bit thin, a business card that reports your full account activity may help. For example, if you avoid credit cards and use a debit card, then you may have a “thin” credit profile that could benefit from the boost another card can help provide.
Choosing a business credit card that does not report to personal credit may be helpful if you know there will be times you need to run up charges that put you close to the limit or carry a balance — think holiday inventory, or that big tradeshow, for example — and you don’t want that activity to bring down your scores.
Following are the policies of the major business credit card issuers at a glance:
|Bank of America||No||No|
*Capital One activity is flagged as ‘small business’ when reported to personal credit reports.
**Discover does not offer a small business credit card at this time.
***Wells Fargo generally does not report negative information to the owner’s personal credit, but reserves the right to do so.
Confirmed with card issuers November 2015. Be sure to check with your card issuer for updated information.
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Ultimately, you’ll have to decide whether having a card that does (or doesn’t) report monthly account activity on your credit reports is right for you. Either way, you’ll want to keep tabs on your personal and business credit scores, to make sure they are as strong as possible–and stay that way.
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