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Does a Small Business Credit Card Affect Personal Credit?

Written by John Ulzheimer

Small businesses, defined by the Small Business Administration as companies with 500 or fewer employees, account for a massive number of U.S. based businesses. According to Forbes, in 2013 there were nearly 28 million small businesses in the United States.

With so many small businesses in existence, it should come as no surprise that the popularity of business credit cards continues to remain high despite the fact that business cards do not offer the same protections afforded to personal credit card account holders.

Responsibilities of small business owners

Small business owners who take out business credit cards to fund the operations of their companies often do so without fully understanding their personal responsibility.

After all, one of the primary reasons business owners form corporations or LLCs is to protect their personal assets in the event that the business fails, is sued, or has claims brought against it. The fact that a business owner could indeed be personally liable for certain business debts is quite often an unpleasant surprise.

Personal Guarantee or “PGs”

When a business owner applies for a small business credit card it’s almost a foregone conclusion that the credit grantor is going to require the applicant to sign a personal guarantee. Signing a personal guarantee, or “PG,” on a business account signifies that the individual is agreeing to be held personally responsible for the repayment of the debt in the event that the business is unable or unwilling to make good on their obligation.

In other words, if the business does not pay the bills then the business owner is on the hook personally for the balance.

If a personal guarantee is required to open a small business credit card then the personal credit reports and scores of the applicant will be pulled in order to determine if the applicant, not the business, meets the qualification requirements set forth by the credit card issuer.

If the person applying for the card has significant personal credit problems then the chance at approval for a small business credit card account is slim to none. This is where personal credit bleeds over into small business credit.

Impact of business credit cards on personal credit

When an applicant signs a personal guarantee for a business credit card the card issuer (or lender) is legally allowed to report the activity on the account to the three consumer credit reporting agencies — Equifax, Trans Union, and Experian.

Small business entries will be considered by credit scoring systems just like any other credit obligations. Credit scoring models do not differentiate between personal and business accounts in any way.

Normally business accounts are not reported to a consumer’s personal credit reports as long as the payments are being made responsibly and in a timely manner.

Of course, there are some exceptions to that rule and some small business credit card issuers will report monthly activity, even while the account is in good standing.

If a business credit card goes into default then it’s almost certain to show up on the credit reports of the individual who signed the personal guarantee when initially opening the account. If the defaulted business card is reported on a consumer’s credit reports then there will likely be a negative impact on his or her scores.

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John Ulzheimer

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