Can Business Credit Cards Drag Down Your Credit Score?
By Eva Norlyk Smith, Ph.D.
October 25, 2010
For the small business owner, a business credit card is often more than a nicety: it’s a necessity. A small business credit card can help regulate cash-flow, allow for larger up-front purchases, and even take the place of a loan. However, while carrying around a small business credit card can help cardholders’ business, as it turns out, it may unfortunately also hurt their credit score.
Traditionally, card issuers have only reported business credit card accounts to the three credit reporting agencies, Experian, Equifax, and TransUnion, if the account became delinquent. Now, however, according to the Wall Street Journal, some major credit card issuers have begun reporting business credit card action along with personal credit card information. This carries far-reaching effects for a cardholder’s score.
Small business cards usually carry very generous credit limits, reflecting the higher revenue stream that businesses typically have. For the company cardholder, making use of this extensive credit line can greatly ease cash flow management and give greater flexibility in a business’ day-to-day operations. However, when card issuers report business credit card debt alongside personal credit card debt, the resulting combined debt load easily gives the appearance that the business card holder has overextended themselves by taking on excessive credit card debt.
For example, a cardholder with $13,000 in personal credit card debt and $35,000 in business credit card debt would appear to have $48,000 in credit card debt. This is a figure far beyond what most people’s personal income can support, even while it may be a relatively small amount in relation to the company’s revenues. By artificially increasing the overall outstanding credit card debt, cardholders’ credit utilization ratio will be inflated, potentially drawing down FICO scores.
In addition, other credit card issuers looking at the debt load may flag the cardholder as an increased credit risk, failing to take into account that the debt will be paid off by the cardholder’s company, and not by the cardholder. This could result in a snowball effect of lowered credit limits and interest rate hikes. Furthermore, if the business cardholders were to apply for another type of loan, their business credit card debt load could hurt their debt-to-income ratio by making their debt obligations look artificially high, since business revenues would not be counted as part of the person’s income.
To avoid these drawbacks, anyone considering applying for a business credit card may want to look for issuers who report business credit card card activity separately, and not as part of the personal credit card information. For example, American Express and JP Morgan Chase report business card accounts only to commercial credit bureaus such as D&B and Experian’s Small Business Services—unless the account is behind in payments. This allows small business owners to maintain their personal credit record while still taking advantage of the benefits small business credit cards offer.
Business credit cardholders should keep in mind, however, that all credit issuers report defaults on business credit card accounts to the major credit bureaus, so in the case of default, there is no way to avoid the default pulling down personal credit as well.
Further, business credit cardholders should be aware that should the company fold and be unable to pay off the business credit card, the credit card agreements of business credit cards generally give card issuers’ the right to go after cardholders’ personal assets. Lastly, before applying for a business credit card, take into account that the new provisions of the Credit CARD Act do not apply to credit cards used for business or professional purposes.