Regularly broaching credit limit on business card brings risks
But it's less likely to hurt your credit score than maxing out a consumer card
By Elaine Pofeldt
Your Business Credit
Editor's Note: Your Business Credit is a new column featuring reader questions about small business and credit. Elaine Pofeldt will be giving advice based on her own research and interviews with finance experts. Pofeldt is an entrepreneur and business journalist whose work has appeared in Fortune Small Business, Money magazine and many other publications. Please send relevant questions to Your Business Credit.
Dear Your Business Credit,
I have a small business I run from my house and I regularly make $1,000 to $1,500 purchases on my credit card with a $1,600 limit to get the cash back. I always pay off the entire amount within a couple days. Can this be bad for my credit? -- Mitchel
Thank you for your question. I'm excited to be writing this new column for CreditCards.com, and hope I'm able to save fellow small business owners like yourself valuable time digging for answers.
When I described your credit card habits to Emily Chase Smith, an attorney who specializes in debt solutions, she said it appears that you are using your credit positively overall. Your credit scores are based on how you handle credit, and if you are staying within your credit card's limit and paying off the balance on time, you should be building a strong credit history.
You didn't mention if you use any other credit cards. If this is your only credit card or you have borrowed to the limit on a bunch of other cards, your actions may be lowering your FICO scores, says Chase Smith. Lenders use these scores, issued by the three major credit reporting bureaus, to determine your creditworthiness. Approaching the "ceiling" of the credit that has been extended to you can cause your scores to drop, she says.
It's also not clear from your note if your credit card is a business card or personal card. Either way, your borrowing would affect your personal credit rating in most cases. Here's why: It's very difficult to get an unsecured line of credit on a business card, according to Chase Smith. "Almost across the board, they're personally guaranteed, whether people realize it or not," she says.
Credit card issuers may report your usage of a business card for which you've made a personal guarantee to credit bureaus. That said, the chances of them doing so are less than for a personal card. A December 2012 report by the Consumer Finance Protection Bureau says that card issuers usually report monthly on consumers' revolving credit lines to the bureaus "but are less likely to report on small business cards, even when these are owned by, and underwritten based on, the personal credit history of the business owner."
Typically, card issuers will not report to the bureaus about a business card with a personal guarantee unless you have gone into default, according to John Ulzheimer, president of consumer education at SmartCredit.com. "If it is a small business card, and the issuer of the card happens to report it to the consumer credit bureaus, then the card is treated no differently than a true consumer credit card," he says.
Taking a look at your credit reports is a smart habit and will give you a clear idea of where you stand. Under the Fair Credit Reporting Act, you are entitled to get a free copy of your credit report every 12 months from each of the three national credit reporting companies: Equifax, Experian and TransUnion. For details on how to order one, go to annualcreditreport.com, call 877-322-8228 or complete the Annual Credit Report Request Form and send it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281
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Published: December 31, 2012
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