The Ins and Outs of Business Credit Cards

A business credit card can be a big help to business owners. But if not used properly, they can cause credit scores to drop, affecting personal credit.

There are a number of ways cardholders can negatively impact their credit score. The biggest culprit? Carrying too much debt on their business card which raises their debt-to-credit ratio. To calculate this ratio, divide the total amount of debt by the total amount of credit you’ve been extended—for both personal and business. Keeping this number at 30 percent is a good way to improve your credit score. Much higher and lenders may consider you more of a risk.

Because business and personal credit card balances are combined to calculate a debt-to-credit ratio, having a large balance on a small business card, or even a balance near the middle of your credit limit, can have a huge impact on your credit ratio.

Other Business Spillovers
Most small business credit cards require the cardholder to personally guarantee the debt. If the balance isn’t paid off through the business, the owner must pay the entire amount out of pocket.

If there’s a problem paying a business credit card bill, the card issuers may report it to the cardholder’s personal credit reports. Some card issuers will report all activity, negative or positive.

This isn’t a problem if you pay your business card on time and avoid high balances. Such habits on a business credit card may even help boost a credit score when combined with a personal credit report. But using a business credit card too often could hurt your personal credit.

Too Many Credit Applications
Having too many recent applications for credit, including for a business credit card, can cause your score to drop. Two credit applications in a short period of time isn’t a big deal, but more can be interpreted as a sign of financial distress and that you owe a lot of money.

When applying for a small business credit card, don’t apply for several at once. If you’ve recently applied for a few personal credit cards, then wait a few months before trying to get one for your business.

Don’t Seek a Home Loan
If you’re applying for a business credit card, avoid a home loan. Or wait until your home loan closes before applying for new credit cards. A new inquiry into your credit can delay your home loan.

Also avoid applying for a small business credit card when applying for other types of loans, such as a small business line of credit, auto loan or other type of major loan.