Credit cards can be an indispensable tool for small businesses. These products offer companies a secure and convenient method of payment while providing a valuable means of financing and being more readily available than other options like a small business loan. But with a small business credit card, its balance and payment information will be recorded on the credit histories of the primary account holder, just like a consumer credit card. This isn’t a problem when your small business cards are managed responsibly, but it causes issues when they are are not.
Here are five ways that a small business credit card can hurt your credit.
1. When you fail to make on-time payments
With both small business and consumer credit cards, making your payments on time is one of the most important things that you can do to build and maintain a positive credit history and a high credit score. If problems with your company’s cash flow affect your ability to pay your small business credit cards on time, then as the primary account holder, it can damage your personal credit history and lower your credit score. Thankfully, most small business credit cards offer email and text reminders to ensure you don’t forget their due dates. Furthermore, most card issuers also allow you to create automatic payments.
2. If you default on your small business credit cards
Starting a small business is a risky venture, and many don’t make it. When you use your small business credit card to finance the operation of your company, your are tying your personal credit history to the fate of your company. If you end up defaulting on your small business credit card account, you’ll find your personal credit history severely damaged and your credit score will decline sharply.
3. When you carry too much debt
Another major factor in your credit score is your debt to credit ratio, which is your total amount of debt divided by the total amount of credit you’ve been extended. This number should be as low as possible and many experts cite 30% as a rule of thumb. But when you have a large balance on your small business credit cards, it could result in a high debt to credit ratio. In fact, this can happen even when you avoid interest by paying your balance in full, as each month your balances can be reported to as debt.
4. When applying for small business cards creates too many new applications
Although less important than your payment history or your level of debt, the number of recent applications for credit is a factor that can affect your credit score. One or two new applications for credit is not a big deal, but if you have more than that in a short period of time then the credit scoring formulas can interpret that as a sign of possible financial distress.
To prevent this from affecting your credit, avoid applying for several small business credit cards at once. Also, try not to apply for a small business credit card if you’ve recently applied for one or more personal credit cards. By spacing these applications out, you’ll avoid the appearance of needing several new loans at once. Small business owners reportedly spend an average of 33 hours to seek out and apply for just three credit applications. There are tools that can help you cut down on both time and amount of applications sent out. You can be matched with the best financing options for you with Nav, and you’ll also get to see your business and personal credit scores for free.
5. When you open a new small business credit card account while you are applying for a home mortgage
Home mortgages are a special type of loan, and the lenders will take unusual precautions when you apply for one, or a refinance. After you’ve submitted your home mortgage or refinance application, you should always avoid any new application for credit until your loan closes. When you apply for a new loan during this time, it will change the details of your application, and can cause serious delays. You will also want to avoid applying for a small business credit card when you are applying for a small business line of credit or any other type of major loan.
This article was originally written on May 25, 2018.
I thought business credit don’t effect your personal credit. EIN & Duns # you use for your business. I know your personal credit is the foundation for you get business going. So why is personal credit rates from 300- 850 and business credit is from 1 – 100
So how can I keep these two completely separate? I’m assuming that I would just find cards that have no Personal Guarantee? Forgive my ignorance, I’m still getting my feet wet with business ownership.
Hi Jake, all the major issuers require a personal guarantee for small business credit cards. Most cards, however, will only report your card payment information to personal credit if you default (see how each of the major issuers reports to personal credit here: https://www.nav.com/resource/do-business-credit-cards-report-to-personal-credit/). I would suggest getting a business credit card, keeping your business purchases on the card, and being mindful about making payments by the due date when you can.