Personal Credit Cards vs. Business Credit Cards

You’re probably already familiar with the way personal credit cards work. As a business owner, you might have opened a credit card account or two for your company as well. Yet while the pieces of plastic you carry in your wallet may look similar, personal credit cards and business credit cards have some key differences.

Here are four important facts about personal and business credit cards that you should know.

Personal Cards vs. Business Cards

1. Business credit cards might not show up on your personal credit reports.
Many business credit card issuers will not report your business account to the personal credit bureaus (unless you default on your payments). While the fact that your business card may be absent from your personal reports means that the account can’t help you to build personal credit, that missing account could also be a blessing.

Here’s why.

Around 30% of your personal credit scores are largely based upon your credit utilization ratio. Credit utilization is the percentage of your credit card limits being used (according to your credit reports). Let your utilization rate climb too high and there’s a chance your personal credit scores could decrease.

You might use your business credit card to finance large purchases for your company. However, if that business account isn’t included on your personal credit reports, the balance and utilization ratio on the account won’t impact your personal credit scores.

Of course, you shouldn’t assume that your business card won’t show up on your personal credit reports. Some small business credit card issuers report activity to both the consumer and commercial credit bureaus. When in doubt, it’s always best to ask the card issuer about its credit reporting policy.

2. Your personal credit will matter for both types of cards.
As mentioned, many business cards won’t appear on your personal credit reports once the account is open. Yet you can almost guarantee that your personal credit will be checked whenever you apply for a new business credit card account. This means that if you have personal credit problems, you might have trouble getting approved for a new credit card for your company.

Also keep in mind that many business credit card issuers will require you to provide a personal guarantee when you open a new account. A personal guarantee means that if your business is unable to repay its debt, you could be on the hook for the bill personally.

3. Business credit cards aren’t covered by consumer protections.
One of the biggest differences between personal and business credit cards are the legal protections you can enjoy as a card holder. As a consumer, you are protected by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (aka the CARD Act) — a law enacted to protect consumers from unfair and predatory credit card practices.

Unfortunately, CARD Act protections do not extend to business credit card accounts. This means that if you opt to use a business credit card instead of a personal account, you could be vulnerable to the following risks:

  • Your interest rate could be raised without advance notice. There is no 45-day advance notice required for interest rate hikes on business credit cards.
  • You might have less time to make your payments before interest is added. A 21-day grace period isn’t required on business credit card accounts.
  • Universal default is on the table. This means if you make a mistake (like a late payment) on an unrelated account on your credit report, your business credit card issuer could hike your interest rate up to the default rate on your account. To add insult to injury, the penalty rate could be applied retroactively to your existing account balance.

Here’s the good news. Even though business credit card issuers aren’t obligated to adhere to CARD Act requirements, many of them do so anyway as a matter of customer service. If you’re searching for a business card that voluntarily applies CARD Act rules to business accounts, ask the card issuer about its policy.

4. Both types of cards can help you to build credit in different ways.

Building positive credit history is important, both for your personal credit profile and your business. When you establish good credit, you can often qualify for better interest rates and terms from lenders on future financing applications. Good credit can also save you money in ways you might not expect, such as lower insurance premiums (both personally and for your company).

A well-managed credit card can be a powerful credit-building tool. On the personal credit side, it’s important to make your payments on time and to keep your credit utilization rate as low as possible. (FICO reports that its “high score achievers” have an average utilization of just 7% on credit card accounts.)

On business credit cards, you still need to maintain spotless payment history to earn stellar commercial credit scores. However, utilization usually isn’t as big of a deal where business scores are concerned. Dun & Bradstreet’s PAYDEX score, for example, doesn’t pay attention to your utilization rates at all. Some business scores created by Experian and Equifax do consider your credit utilization, but utilization doesn’t count as much as it does in personal scoring models.

Of course, it’s still smart to pay your business card balances off in full each month. Some business lenders will consider utilization, even if your score doesn’t. Also, paying your balance in full each month can help you to save money by avoiding expensive interest fees.

Benefits of Having Both Types of Credit Cards

As a business owner, there are benefits to having both personal and business credit card accounts. Having both types of accounts can help you to simplify accounting by keeping personal and business expenses separate. Both accounts might give you access to valuable reward-earning programs as well.

Of course, the biggest benefit of all of you can enjoy with business and personal cards is the potential to build positive credit for yourself and your company. Good credit comes with a lot of perks which could potentially open doors and save you money for years to come.

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