Editorial Policy

Owner on the hook for company card debt

Erica Sandberg

October 17, 2014

QHi Erica,

I had a tobacco shop that went under earlier this year, and I had a business credit card that I used for it. I owe $22,000 on it, and I'm curious, if there is no business, am I still responsible for the credit card bill? Does it affect my personal credit if I don't pay? –Pauli

ADear Pauli,

I'm afraid the answer to both questions is almost certainly affirmative.

In most cases, “business” credit cards are really just lines of credit provided to individuals, developed to meet the requirements of their operation rather than personal needs. For example, the charging limit may be larger, the rewards program may be connected to different items and retailers, and the statements might be designed to integrate with accounting software. Some issuers even offer entrepreneurs specialized guidance. Ask Erica

In general, though, you would apply for the credit card the same way you would for any other: with your good name. And when you do that, you are entering into a binding agreement with the issuer. It lends you the funds necessary to conduct business; you charge; then you repay per the contract.

Assuming you were the sole proprietor or a general partner of the tobacco shop (and it was not incorporated, which can shield personal assets against the claims of creditors and lawsuits), you are liable for the debt incurred on that credit card.

Additionally, even though you may have only used the card for business expenses, the account has been appearing on your consumer credit report from the day it was opened. When you spent with it, paid on time and kept the balance low, it was working in your favor. Your credit score would have increased and options for more loans and credit cards broadened. Meanwhile, your credit score would have suffered if you didn't take care of the account.

You don't make it clear if the card is in positive standing, but if it is, keep it that way by paying on time and paying down on the debt. On the surface, your balance seems high, but if the credit line is three times that, you should be in fine shape. Credit scores, such as the FICO score, rank payment history and credit utilization ratio (the amount you owe in relation to the amount you can borrow — owing less than 30 percent of the limit is ideal) as the most important factors. These two are so important that 35 percent of your FICO score is made up of your payment history, and 30 percent is made up of the amount you owe. (FICO is the dominant score tracked by lenders to assess your creditworthiness.)

Although your shop is a thing of the past, think of your future. One day, you may want to finance another business or apply for a credit card to use for your home or family. As I'm sure you know from previous experiences with financial institutions, an excellent credit rating will be essential to making that happen.

I recommend you continue to (or restart) your on-time payments, and if you can whittle down the debt quickly by sending large amounts, all the better. Perhaps the store had some assets that you can sell off, such as fixtures and merchandise that can go toward the debt.

Also, look for ways to cut out personal costs so you can put more money into the debt. Do you have a gym membership? Look at ways to cut your entertainment expenses in half. Could you cut out cable or eat out less? These costs add up, and if you cut until it hurts, you can pay down the debt that much faster.

In short: Don't let your credit rating go up in smoke.

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