How Small Business Credit Cards Affect Your Personal Credit

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If you're looking for a new credit card, then you’ve probably noticed that many cards are offered in both personal and small business versions. Business credit cards can offer rewards and benefits more suited to the needs of small companies, but how does their use affect your personal credit?

Business credit card basics

When you apply for a small business credit card, the card issuer will check your personal credit report and credit score to see if you qualify for a new account. It doesn’t matter whether you supply an Employer Identification Number (EIN) or a Social Security Number, your personal credit information will be checked, since nearly all small business credit cards require your personal guarantee of repayment. This means that even if your business dissolves, gets sold, or goes into bankruptcy, you’re still responsible for paying off the credit card debt. The credit card may have your business name on it, but as part of the application, you agree to be personally responsible for it. (See also: 5 Ways to Build Business Credit When You’re Self-Employed)

How applying for a business credit card affects your credit

When you apply for any new credit card, it has several effects on your credit. To grasp these, it helps to understand the five main factors that go into your FICO score — the most commonly used personal credit score. These factors are:

1. Payment history (35 percent of the total credit score): On-time payments are the most important part of your credit score. (See also: How Late Payments Affect Your Credit)

2. Credit utilization (30 percent of the total score): It’s best to keep your credit utilization ratio — the amount you owe compared to how much total credit you have available — as low as possible.

3. Length of credit history (15 percent of the total score): The higher the average age of your accounts, the better. (See also: Why the Age of Your Credit History Matters)

4. New credit: (10 percent of the total score): Opening too many credit lines at once could suggest you’re having financial trouble.

5. Credit mix: (10 percent of the total score): Lenders like to see that you can handle a variety of debt types, such as installment loans and credit cards. (See also: How Credit Inquiries Affect Your Credit Score)

When you apply for a new card, it affects the new credit part of your score because the application will result in a new inquiry on your credit report — a so-called hard inquiry. Applying for a single line of credit will have very little effect on your credit score, but applying for multiple new lines of credit in a short period of time could cause a small, temporary drop in your score.

How business credit cards may affect your personal credit differently

In most ways, a small business credit card will affect your credit just like a personal credit card. However, some credit card issuers only report your business credit card account if it’s delinquent and don’t report balance and payment information at all. Therefore, your use of business credit card accounts may or may not affect your credit one way or another. (See also: When to Get a Business Credit Card Over a Consumer Card)

Assuming you have a card that does report regularly to your personal credit, once approved, the new account will affect the credit history part of your score. It will lower the average age of your lines of credit, which on its own might cause a small drop in your score, especially if you have a very limited credit history.

Your monthly balances and payment for this new account will appear on your credit report as well. So long as you make your payments on time, this new account will help build your credit history, which is good for your credit score.

Finally, having a new line of credit may or may not help to reduce your credit utilization ratio. A card with a large credit limit (and business cards tend to have higher limits than personal cards) raises your amount of available credit. But in order to keep your utilization ratio low, you have to keep your balances low. If you quickly max out the new card, you could actually hurt your credit utilization ratio.

If you get a business credit card that doesn’t report to your personal credit, then the small dip in your credit from the hard inquiry will bounce back and nothing else will happen to your credit, unless you default on the business credit card. Then it will appear on your credit report as a loan in default.

The only way to know for sure if your business credit card accounts are reporting your balance and payment information is to look at a copy of your credit report. You can obtain a free credit report each year from each of the three major consumer credit bureaus by going to AnnualCreditReport.com.

How business credit cards affect your business credit report

In addition to possibly affecting your personal credit report, your small business credit card may also affect your business credit reports. Your issuer may report your balance and payment information to companies that compile credit reports on small businesses. The main business credit reporting agencies are Dun & Bradstreet, Experian, and Equifax. For many small businesses, having a strong business credit report is vital to securing future lines of credit and favorable payment terms from suppliers. It’ll also benefit you to be able to get funding without a personal guarantee, which can only happen by building a strong business credit history first.

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