Do Business Cards Affect your Personal Credit Score?
As an entrepreneur, it’s always prudent to separate your business and personal finances when it comes to credit cards. When applying for a business credit card, almost all issuers will want a personal guarantee from an owner or executive because their credit scores reflect the ability to repay a debt — especially if you’re a fledgling business owner without any business credit to your name.
Which credit score a bank will use to grant approval for business credit lines is often where some of the confusion sets in. But how does applying for a business credit card affect your personal credit — if it even does at all?
Understanding your business credit score and the impact of new accounts
You can get a business credit score from one of four different agencies: Experian, Equifax, Fair Isaac Corp.’s Small Business Scoring Service (FICO SBSS) and Dun & Bradstreet (D&B). All four agencies derive business credit scores from proprietary algorithms. In the case of the latter bureau, businesses need to register with D&B to receive a unique identifier that lenders or suppliers can use to identify a specific business and gauge the creditworthiness of a prospective customer. The door swings both ways, so you can also get credit and other pertinent financial information on customers who seek payment terms for goods and services offered by your organization.
If you’re asked to use a Social Security number to apply for a business credit card, that submission will likely affect your personal credit score. The hit resulting from the inquiry into your personal credit will temporarily lower your score.
It will also impact your credit utilization ratio when the new account shows up on your credit profile. Credit utilization ratio is your total outstanding debt divided by your total available credit. If you’re not making a lot of purchases immediately with your new business credit card, the additional credit line could lower that ratio and boost your credit score.
The blurry line between personal and business credit scores
Unlike personal credit scores, which range from 300-850, business credit scores run on a scale from 0-100.There are very few free services that exist to pull detailed reports from the three bureaus that gauge commercial credit. Thus, to obtain your business credit score, you’ll usually have to pay a fee for anything other than a summary from a business credit monitoring service.
Before paying for a report, it might be worth looking at a summary to determine if your creditors are reporting payment activity to business credit bureaus. This process doesn’t usually occur automatically, unlike most personal credit activity. You may need to request vendors or suppliers to report payment information to establish a solid business credit profile.
For almost all businesses except corporations, a credit card issuer will require the Social Security number of a business owner who is applying for the program. This requirement is necessary because owners of small businesses are ultimately responsible for the financial position of their organizations. As such, business debt that goes unpaid will follow the business owner and conceivably hurt that individual’s personal credit score.
Business credit card issuers that could impact your personal credit
Not all credit card issuers will report business activity to personal credit bureaus. That endeavor often hinges on the type of activity taking place. Here’s a partial list of banks that reflects how the crossover between personal and business credit reporting is handled:
Policies and procedures for business credit reporting change frequently among issuers. So, it’s wise to check with the bank periodically to see if these guidelines have changed.
Using a business credit card to build personal credit
With all the fuzzy correlations between personal and business credit, there’s one rule that’s crystal clear — responsible use of a business or personal credit card will only benefit you and your organization in the long run. Opening a new business card account may ding your personal score slightly, but that’s temporary and will likely disappear in a few months. More importantly for your financial well-being, you should make timely payments on your cards and avoid carrying balances from month to month. This strategy will improve your payment history, decrease monthly interest charges and raise both your business and personal score, if applicable.
Along with building a strong business credit score, prudent credit card use can help your company’s bottom line. Organizations that rely on travel can benefit from business cards that offer points, miles or cash back for airfare or hotel bookings. These rewards programs, depending on spending levels, can save your business hundreds or even thousands of dollars on fuel, food and office supplies. Recurring bills for utilities and inventory can be used to ramp up rewards and cut costs.
The bottom line
Business credit cards are a straightforward way to help businesses manage cash flow and can be a stepping stone to capital equipment loans, business lines of credit or commercial mortgages. The more appealing your business credit profile looks to a potential lender, the more likely you’ll be able to broaden your business financing options.
As a business owner, the key to obtaining financing at optimal rates will hinge on keeping your balances low and making monthly payments on time. You can’t be exactly sure if or when your bank might hand over negative business card activity to personal bureaus. However, you won’t need to worry if you keep your credit history on the right track.