How business credit affects personal credit scores depends on whether or not there is a personal guarantee involved. Most credit card issuers require a personal guarantee, and making timely payments may boost your personal credit score. Business credit can also cause your personal score to decrease if you default on payments.
Whether your business is a sole proprietorship or incorporated, consumer credit reports may still be involved. One of the best ways to boost your personal and business credit scores is to open a business credit card like the Capital One® Spark® Cash for Business. Capital One reports all activity to both consumer and business credit bureaus, so this card is a good pick for owners who pay their bills on time.
The Difference Between Business Credit & Personal Credit
Business credit and consumer credit are similar in that they are both based on payment history, debt incurred, and types of credit listed on your profile. Personal credit scores fluctuate based on a number of factors, including hard inquiries. In contrast, business credit scores aren’t negatively impacted by the number of people pulling credit reports, since it’s public information.
Personal Credit Score
Your personal credit score is linked to your Social Security number (SSN) and is made up of the activity associated with it. The three agencies responsible for tracking your personal credit report are Experian, TransUnion, and Equifax. Revolving credit like personal credit cards, and installment loans like mortgages and auto loans, will show up on your consumer credit report.
Activity like delinquent bills, late payments, and new credit accounts are reported to one or all of the consumer credit bureaus. This activity, coupled with your credit utilization ratio, makes up your personal credit score, which can range from 300 to 850. The average age of credit on your report accounts for up to 15% of your credit score. Opening new business credit cards can reduce your score upon approval, even if only temporarily.
Business Credit Score
Business credit scores operate a little differently than personal credit. The most common credit reporting agency for businesses is the Dun and Bradstreet (D&B) credit bureau. Business reports can be pulled from other agencies, including Experian SmartBusinessReports™ and Equifax Small Business Enterprise. Although sole proprietors aren’t required to have an employer identification number (EIN), you’ll need one to establish business credit.
Unlike personal credit, your business credit report and score is available to the public. This means that inquiries from creditors have the least impact on business reports. Business credit scores like D&B PAYDEX are based on debt, vendor bills, and the type of industry your business operates in. D&B PAYDEX scores range from 0 to 100. You can check your business credit scores for free through NAV.
Does Business Credit Affect Personal Credit?
Your business credit and your personal credit are closely related. In some cases, creditors will review your personal credit report for payment history, active accounts, and debt accumulation. Business vendors may also use your personal credit to verify information like address and contact numbers. Keeping your personal credit profile up to par can help with your overall business profile.
Creditors will use your personal credit if you haven’t established enough business information or if the account type requires someone be held personally responsible. If you default on the account, the credit issuer will report it to the credit profile linked to your Social Security number (SSN). If your business is a sole proprietorship without an employer identification number (EIN), then you’re essentially using your personal credit for all business dealings. Positive and negative business activities can affect your credit score.
4 Ways Business Credit Affects Personal Credit
Owners who sign a personal guarantee on a business product will link that product to their SSN. It typically requires a hard credit check on your consumer credit report and could negatively impact your score. Even businesses that signed up for a credit card without a personal guarantee may still be personally impacted by that account. Many vendors will use your personal credit information to verify your creditworthiness.
Four ways that business credit can affect personal credit scores are:
1. When You Have a New Hard Inquiry
Small businesses that apply for new credit will likely be asked for their personal information including their SSN. Even if you’re not applying for a new line of credit, some creditors, and even vendors, will use your personal credit profile to verify if your information is correct. Any increase in the number of hard credit inquiries on your consumer credit report can have an impact on your personal credit score.
2. Opening a New Business Credit Card
Just like with your personal credit score, new credit accounts on your business credit report can temporarily drop your credit score. However, some business credit cards don’t report payment activity to consumer credit bureaus. Businesses often build credit that way, but most of these cards require a personal guarantee. That means owners will be held responsible for debt, and your personal score will change based on any unpaid balances on that account.
3. When You Pay Late on Business Accounts
In some cases, lenders will report to both consumer and business credit bureaus. Late payments made on your business account can have a devastating ripple effect on your personal reports as well. Creditors can hold you personally responsible for any accounts with a personal guarantee. Businesses that don’t want their credit score to take a hit should pay their business and personal debt on time.
4. When You Have Liens, Judgments & Bankruptcies
Defaulted debt can be a heavy weight on owners looking to keep their personal credit scores high. Business accounts where owners personally signed for responsibility will be held liable for that debt. This is true even if the business fails and you file for bankruptcy. General partnerships can also be held responsible for business debt, which can impact both you and your partner’s personal credit files.
How Personal Credit Affects Business Credit
Your personal credit is sometimes more closely related to your business credit than the other way around. Vendors will often use your personal credit profile to determine your eligibility for payment obligations, including leasing and installment loans. In some cases, it’s just not possible to move forward with business dealings if your personal credit profile is damaged. A low personal credit score can prevent you from qualifying from business funding.
Issuers That Report to Consumer Credit Bureaus
One of the most common forms of business credit owners rely on is business credit cards. Businesses use credit cards that don’t report to consumer bureaus to ensure their personal credit profile isn’t impacted. Whether owners are looking to fund expenses or establish business credit, business credit cards are a convenient source of business funding.
Which Issuers Report to Consumer Credit Bureaus
Reports to Consumer Credit Bureaus
Only if your account is delinquent
Only if your account is delinquent
Only if your account is delinquent
Business cards with American Express, Bank of America, and Chase will show up on your personal credit in the event of delinquency. Unsecured cards are risky for issuers, and they want to be sure they can collect a debt in the case of a default. Owners looking to avoid that should keep their business cards current while consistently making timely payments.
Businesses should also choose a provider that doesn’t report to consumer credit bureaus. This can help owners keep business debt separate from personal credit. Citibank, U.S. Bank, and Wells Fargo are issuers that do not report to consumer bureaus. These providers are a good place to start for owners looking to keep their business activity from affecting their personal credit.
Ways to Protect Personal Credit From Business Activity
Keeping your business accounts separate from your personal account is a good way to do business. The IRS can be strict about businesses not mixing the two, and there can be stiff consequences, like penalty charges, when you do. Having clearly defined business activity can reduce the impact on your personal credit score and make bookkeeping much easier.
The ways you can protect your personal credit from business reporting are:
Incorporate Your Business
This is the No. 1 way to protect your personal credit score from your business activities. Businesses that register as an LLC or a corporation won’t be held personally liable for business debts. In most cases, bankruptcy filed under LLCs, S corporations, or C corporations do not impact your personal credit score. This excludes any debt that has a personal guarantee.
Apply for an EIN Number
Sole proprietors typically use their SSNs to conduct business, but you have the option to get an EIN. Although having an EIN will not eliminate the need to use your SSN, it can open you up to more options. For instance, most corporate cards, corporate gas cards, and prepaid business cards allow you to apply and open credit card accounts using only your EIN.
Keep Your Business Payments Separate
It’s not uncommon for owners to use personal deposit accounts and credit cards to pay business expenses. This is especially true for sole proprietorships. Owners looking to protect personal credit from business activity need creditors and vendors to report to business credit bureaus. Sometimes vendors will opt out of reporting payment activity when you use your personal accounts to make payments.
If the business credit bureaus or vendors see you making business payments from a personal account, it will often be reported as personal activity. Even worse, you may have to answer to the IRS when explaining expenses later. The best practice is to only use your business accounts for business purposes. We recommend opening a business checking account and being mindful of your payment activity.
Get a Business Credit Card
Opening a business credit card can help owners keep their business expenses organized. Although they often require a personal guarantee, a business card allows owners to make business payments. What’s more, you’ll have business activity that’s identifiably separate from your personal account.
In most cases, issuers won’t report your card activity to personal credit as long as you stay current with your payments. You can shop and compare the best business credit cards in our credit card marketplace.
Verify Business Information
Creditors can use both consumer and business information to determine your overall creditworthiness. Just like your personal credit, your business credit could have errors. Businesses should review their business credit reports regularly for discrepancies. If you notice business activity that shouldn’t be on your personal credit report, you’ll need to report any errors to the credit bureaus.
Frequently Asked Questions (FAQs) for How Business Credit Affects Personal Credit Scores
We covered a lot of information about how business credit affects personal credit scores. We’ll address some of the frequently asked questions here. An expert will respond to your question at the first opportunity.
Does applying for a business credit card affect my personal credit?
In most cases, credit card providers require a personal guarantee to qualify. This means that even when using your business information, the issuer will hold you personally responsible for the debt. If you then have late payments or default on the account, your personal credit score will take the hit.
Is there a difference between business credit & personal credit?
The difference between business credit and personal credit is the bureaus on which the credit profiles appear. Personal credit is handled by Experian, Equifax, and TransUnion. Business credit is mainly collected for Dun & Bradstreet (the most widely used), Experian Business, and Equifax Small Business.
How do I convert personal credit to business credit?
You can’t convert your personal credit into business credit, but you can establish a separate business credit profile. People who run their business under their own consumer profile can start by registering for an Employer Identification Number (EIN). Opening separate deposit accounts and credit cards under the EIN number is a good place to start.
Your business profile and personal credit are more intermingled than you may realize. Owners looking to protect their personal credit can do so by incorporating their business, avoiding defaults on personally guaranteed loans, and by opening separate accounts for business activities. Even with this, businesses should aim to keep their personal credit in good condition to avoid denials for business and personal dealings.
Business credit cards typically require a personal guarantee, but most providers won’t report payment activity to the consumer credit bureaus unless you’re late or in default. Owners looking to establish business credit can do so by opening a business credit card like the Chase Ink Business CashSM. With this card, you’re protected from business credit affecting your personal credit as long as you stay current with your payments.