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How can your business credit cards hurt personal credit score?

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By: Barbara Delinsky
on 4th Jul,2017

Here are a few ways your business credit cards hurt your personal credit score. And what should you do to protect your personal credit rating while opting for a business credit card?
How can your business credit cards hurt personal credit score?

Building business credit is a smart financial move. It will help you to get low-interest rate loan for financing. With the help of a good business credit rating, you can also get affordable insurance rate for your business.

But, do you know that your business credit cards can hurt personal credit?

1 Account spillover can affect your personal credit

Sometimes the business loan you took out for financing your business turns out as a personal loan.

If you default or miss your payments, your personal credit score will get affected negatively. It can affect your debt-to-income ratio as well.

Most of the major credit card issuers report business credit cards to business credit agencies.

But there are few credit card issuers who report business credit card activity on the personal credit reports.

2 Too many inquiries can affect your personal credit

Some business owners believe that the lender will not check their personal credit before approving their business loan, which is a wrong concept.

Most small business credit card issuers prefer to check the applicant's personal credit score before approving a business loan.

Your personal credit report will be checked by your lender.

An "inquiry" will be there on your credit report. Thus, your credit score may drop a few points.

3 No positive score will be given

If you apply for a business credit card or take out one from your employer, be aware! It will affect your personal credit score negatively.

Usually, each month, the creditor updates your credit report based on your payments (on-time payments, missed payments, etc.) and send it to the credit reporting agencies.

For a business credit card, on-time payments will not raise your personal credit score.

But, once you default with your business credit card, you will get a negative score. Your credit score will drop.

Remember, if your employer provides you with a card (on which employer is supposed to make payments) in your name and and misses payments, it will show on your credit report.

4 The FICO and VantageScore credit scoring methods are same

Your business credit card activity will be treated the same as your personal credit card activity by both the FICO and VantageScore credit scoring models.

Missing a payment or using too much available credit can hurt both your business and personal credit rating. Closing a credit card is not a solution since the history of your credit transactions will stay on the credit report for up to 10 years.

What should you do to protect your personal credit rating?

1 Check the loan policy before signing

You need to be careful while filling out an application for a business loan. If the lender asks you questions related to your personal credit, like your SSN instead of the Employer Identification Number, then maybe the lender is considering to offer a personal loan instead of a business loan. If it happens with you, clarify the policy before proceeding; otherwise, you will be in trouble.

2 Seek financial advice

Try to apply for a loan that you really need. Don't apply for multiple loans unnecessarily. You can seek a financial advisor's guidance to make the right decision.

3 Consider a safe option

A business has its ups and downs. So, to avoid risks, you can apply for a card that doesn't report account activities to the consumer credit bureaus.

Lastly, I would like to say that keeping a business credit card that does not report to the consumer credit bureaus can still affect your credit rating.

You are liable to the debt that you have signed as a personal guarantee.

If you default on your business loan, the lender will send your accounts to the collection, which will appear on your personal credit report regardless of how other credit information is reported.

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