Published By Janet Gershen-Siegel at September 9, 2017
Many small business credit cards require that the business owner (usually this person is also the cardholder, although not all the time) to personally guarantee the debt. That means that if the balance is not paid off via the business, then the owner will end up being responsible for the entire amount. It also means that business account activity could potentially spill over to the owner’s personal credit reports. However, this depends upon each card issuer’s policy.
Some card issuers only report activity to the cardholder’s personal credit reports in the case of the owner defaulting, whereas others will report all activity, and will not distinguish between positive and negative activity.
The easiest way to keep business credit activity off your personal credit report is to use a business credit card which does not report business activity to personal credit bureaus. However, the decision to use a card such as this should not be made lightly.
Which is better? It all depends upon your situation. If you pay your business card on time and avoid high balances, then a business card that appears on your personal credit reports with Experian, Equifax, and TransUnion should not be a problem. It could even help your credit scores.
However, if you charge everything you can on your card in order to rack up rewards, then your personal credit could conceivably suffer. Credit scoring models will take into consideration your debt usage or utilization ratio. This compares the reported balances versus available credit limits. It is often for each card as well as all credit cards combined. A high balance on a business card which appears on your personal credit can mean a higher debt usage ratio. And that can lower credit scores.
And paying the balance off in full every month alone is unlikely to solve this problem. The reported balance is often the balance as of the statement closing date, and not after a payment has been made. Therefore, if you want lower balances to get onto the reports, you need to make your payments before either the statement closing date, or whichever date the issuer reports.
However, if your personal credit history is lacking, a business card which reports your full account activity could help. Hence, if you avoid credit cards and use a debit card, you may have a “thin” credit profile. It could benefit from the boost another card could provide.
Opting for a business credit card which does not report to personal credit may help if you know there will be times you need to run up charges putting you close to the limit or carry a balance. This could be for anything from investing in new equipment to spending to prepare for a trade show. Of course you do not want that activity to bring down your scores.
Generally, it’s better to apply for the business credit card which offers rewards and benefits of the most interested to you, rather than focusing solely on the card’s reporting policy.
Furthermore, if you default, then having a business credit card which does not report regularly to consumer credit bureaus will make no difference. You will still end up personally liable for the debt on the card if you signed a personal guarantee. A personal guarantee is a part of nearly all small business credit card agreements. If the card issuer brings a lawsuit against you for the balance or sends the account to a collections agency, then this activity will likely show up on your personal credit report. That can happen regardless of how any other payment information is reported.
Another way out is to use a business credit card not requiring a personal guarantee. However, those are few and far between. These sorts of cards ask you, the business owner, to meet a set of conditions which can differ from one product to another. These could be annual sales guarantees or they might be requirements to have an open Dun & Bradstreet file or other conditions. If you cannot meet these conditions, then this option will not exist for your business at all.
Finally, as always, it literally pays to separate your business life from your personal life, by opening separate accounts and even incorporating your business, in order to demonstrate to creditors that you and your company are not the same when it comes to credit.