When starting a business, the number one rule is to make sure all business and personal affairs are kept separate. However, when it comes to your credit, this separation is nearly impossible. Since using a business credit card is a popular means of acquiring funds, it is important that all entrepreneurs understand how it impacts their personal credit report.
How Your Personal Score Factors In
Because business card issuers typically do not require collateral, most require a personal guarantee. Some will even report your account activity on your personal credit report. Before the issuer opens an account, they will likely require a personal guarantee agreement. Essentially, this agreement states that you will be personally liable for any balances you incur on the card, and your business will be liable.
This agreement protects the card issuer, in the event that your business fails or there is not enough cash flow to cover on-time payments. Basically, you have co-signed the account. If you fail to keep up with payments, the card issuer has the right to go after your personal assets for repayment.
There are two other ways business credit cards impact your personal credit that you should be aware of:
- Because they require a personal guarantee, card issuers will want to know that your personal credit is in good standing. They will more than likely ask for an employer identification number or a Social Security number. The issue? When the credit card company runs what is called a hard inquiry on your personal credit report, it can have a temporary negative effect on your credit score.
- Ongoing Reports. Depending on the business credit card issuer, some will report all of your account activity to your personal credit report, while others will notify credit bureaus only when you fall behind on payments. In most cases, reporting is triggered by some action. Before you sign with an issuer, make sure you know how they will report your account activity.
Whether a business credit card is right for you – and be good or bad for your credit history – will completely depend on your situation. If you feel you will be able to maintain the account without issues, it could help your credit. However, if you fear maxing out on business expenses and that payments will be hard to keep up with, it is probably best to steer clear of them.
What if credit cards are completely out of the question, you ask? If you are already struggling with bad credit from past situations that got out of hand, consider working with an alternative lender. Securing a bad credit merchant account, for example, will provide the access to the funds you need and an option that will help you rebuild your score overtime. The biggest advantage is working with a provider that specializes in working with business owners that find themselves in this situation.
Author Bio: Electronic payments expert Blair Thomas is the co-founder of high risk payment processing and bad credit merchant account company eMerchantBroker. He’s just as passionate about his business as he is with traveling and spending time with his dog Cooper.