The right business credit card offers a lot of benefits to a small-business owner. Not only does a business credit card help you earn valuable points and miles, but it also may help you establish a better commercial credit rating for your company.
But will a business credit card help build your personal credit scores? Unfortunately, there is no simple answer to that question. Although your account management is the most important factor in getting or keeping a good credit score, there are a few ways that a business credit card might help improve your personal credit score.
Related: How to build credit
Establish personal credit
Credit cards, business or personal, help you establish or boost your credit rating. Most personal credit cards report account activity monthly to the three major consumer credit reporting agencies — Equifax, TransUnion and Experian.
Business credit cards work a little differently. Most issuers report your account information each month to one or more of the business credit bureaus. These card issuers give you the opportunity to build positive commercial credit when you open an account. Though not necessarily the norm, some issuers of business credit cards also report your account activity to the consumer credit bureaus each month. When you’re smart about how you manage these accounts, business credit cards potentially help you build business and personal credit simultaneously.
Want to know which card issuers report to the consumer credit bureaus, the business credit bureaus, or both? Ask the card issuer about its credit reporting policy or check this guide for help.
Lower personal credit utilization
Here’s where the magic happens, from a personal credit score perspective. Using a business credit card that doesn’t appear on your consumer credit reports might lower your personal credit utilization ratio. This sometimes makes a big difference where personal credit scores are concerned.
Some small-business owners use personal credit cards for business expenses, especially when they’re starting out. That choice may negatively affect the business owner’s personal credit scores. In other words, it might damage them.
The credit utilization ratio on your revolving credit card accounts influences your personal credit scores. In fact, 30% of your FICO score is based on credit utilization. The higher your credit utilization climbs on your personal credit reports, the worse the impact generally is on your credit score.
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For reference, credit utilization refers to the percentage of your credit limit that’s being used on a credit card (or on all of your credit cards combined). If you have a credit card with a $5,000 limit and a $2,500 balance, the account is 50% utilized. Lower utilization is better.
Now, let’s assume you open a business credit card that does not report to the consumer credit bureaus. The account would not appear on your personal credit reports (assuming you stay current with your payments).
Using this business credit card won’t increase the credit utilization ratio on your personal credit reports. As a result, your personal credit scores won’t be damaged from high usage rates if you decide to tap a large percentage of the business credit limit on your account. You might still be charging the same amount of money each month for your business, but you’d no longer risk hurting your personal credit as a result.
A business card might give you better rewards-earning capability, depending upon the bonus category where you spend the most money. For example, the Chase Ink Business Preferred Credit gives 3 points per dollar on your first $150,000 yearly in combined purchases in categories like travel, shipping, internet, cable and phone services or advertising purchases with social media or search engines.
Account management tips
If you want a credit card to help you improve your credit rating, either on the personal side or with the business credit bureaus, you’ll need to manage the account carefully.
Below are three smart tips for managing your credit card:
- Pay on time. More than one-third of your personal FICO score (35%) is based on the payment history of the accounts that appear on your personal credit report. Payment history also matters with business credit scores, such as the Dun & Bradstreet PAYDEX business credit report. Always make your business credit card payments on time to earn (or keep) a good credit rating.
- Keep your credit utilization low. Your credit utilization rate is almost as important as paying your bills on time when it comes to personal credit scores. Some (though not all) business credit scoring models are designed to consider credit utilization. Ideally, you should pay your full statement balance every month to avoid interest fees. If you want to make sure a low utilization rate appears on your credit reports in an upcoming month, pay off your balance before your credit card’s statement closing date.
- Be patient. Length of credit history is worth 15% of your consumer FICO score and may impact your business credit scores as well.
The most important factor when it comes to credit scores will always be how you manage your accounts. Ultimately, your credit cards are simply tools. You decide how to use them.
Bottom Line
Applying for and using a business credit card can not only help manage your business expenses and help you earn valuable points and miles but can also assist in improving your personal credit score. Paying your statements in full every month can go a long way to show issuers that you’re a responsible borrower who has low credit utilization — a big plus in increasing your consumer FICO score and business credit scores.
Related: 10 considerations for your small-business credit card strategy
