If you are trying to keep your startup finances separate from personal finances, you might be disappointed. It is because the effects of your business credit card often show up on your personal credit score. Even if your business faces hardship or goes through any rough patch, it might affect your personal credit score.
That is to say, eliminating your all personal liabilities with your business credit cards is not possible as they need personal guarantees. However, if you‘re a startup, you can use a credit card that does not report your account activity to credit bureau to limit the risk. It may be one of the safest ways as some business credit cards don’t report to consumer credit bureaus but commercial credit bureaus. Also, there are credit cards that do not report a customer’s monthly payments.
But these are limited options. No matter how helpful your business credit card has been in building credit for your business, it does affect personal credit scores or credit history.
Luckily, there are some ways entrepreneurs use to minimize the risk factors related to their business credit cards and help personal credit scores instead of hurting them. Before exploring those ways, let us take a look at how business credit cards can affect your personal credit scores.
Effects of Business Credit Cards on Personal Credit
Typically, the following are the ways that can affect your credit score if you apply for or use a business credit card.
1. Credit Inquiry on Applying for Credit Card
It is important to know that when a business owner applies for business credit cards, the card issuer considers both his/her personal credit card history and business track record. This may include investigating or checking personal credit, which may affect credit by dropping a few points in the scores.
This is one of the reasons many business credit card bureaus require a personal guarantee on applying. That means if a business defaults on its payments, a business owner can be held liable to pay all the debts.
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2. Utilization of Ongoing Credit
Most of the banks and finance institutes report all account activities to the consumer credit bureau (Experian, Equifax, TransUnion) that includes the ratio of credit utilization of a customer. The credit balances are divided by the total amount of credit limits a user has. That means if you obtain the high balance on a business credit card, it can negatively impact your personal credit card scores.
According to credit experts, it is better to keep your credit card utilization below 30 percent. It makes your business credit cards easy to handle as they come with a high credit limit as compared to a consumer credit card. Plus, if you are planning to make a big investment in the business, it is better to apply for a loan than using your business credit card for it.
3. Reporting Delinquency
As mentioned earlier, some credit card issuers do not report monthly account activities of their customer to the consumer credit bureau. However, they may report your account if you don’t make your payments consistently. Late payments are reported if they are delayed more than 30 days. If becomes a pattern, the negative marks do not only affect your personal credit card scores but also stay up on report for seven years.
A delinquent account is, without a doubt, an important thing to consider when it comes to improving payment history or personal credit card scores. Poor account scores or default account affects your ability to apply for loan affordable. Plus, late payments can trigger an APR penalty that can go up to 29.99 percent with some business cards.
Business Credit Card Issuer Policies that impact Personal Credit Scores
Although all credit card issuers have different policies pertaining to credit card activities, they might report the business information to credit bureaus on the same issues. It is always worth checking the policies.
- Barclays: may report in case of inconsistent payment record
- American Express: if your account doesn’t have good standing, it may report
- Capital One: report all account activities
- Citi: doesn’t report account activity
- Bank of America: reports delinquent account
- S.Bank: doesn’t report account activity
- Chase: reports when an account is delinquent more than 50 days
- Well Fargo: doesn’t report account activity
How to Use Your Business Credit Cards to Build Personal Credit
If you are concerned or apprehensive about the impact of a business credit card on your personal credit scores, there are ways you can use to minimize the effects.
All you need is to practice poor credit behaviors with both your consumer and business accounts.
Here are some of them:
Make Payments on Time
Your payment history plays a major role when it comes to building credit score or improving credit history. It is important to pay at least half of your monthly payment on time, if you want to solidify your credit scores. Paying off the full balance each month is extremely helpful in avoiding interest entirely.
Keep Credit Balance Relatively Low
Keeping a low credit balance is always a good move as your credit utilization has a great impact on your credit scores. You can achieve it by making fewer payments through your credit cards or keeping the credit low. In case your credit use spikes up in any month, you can manage the score by paying down the balance to help your utilization ratio come back to normal.
Use your Credit Card Wisely
There is no denying that business credit cards are a good option to make payments for your operating expenses. But if you want to finance equipment or inventory, paying with a business credit card is harder.
What is more, it may increase interest rate with any business loan you take. That is why it is important to consider all your options first before you choose to make payments with your business credit cards.
Final Thoughts
In a nutshell, getting a small business credit card is a good idea for making payments, it is essential that you understand how it affects your personal credit score.
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