Business mistakes can appear on personal credit report
Dear Credit Score Report,
I have incurred
credit on my business credit card for $60,000. I cannot pay the company anymore. I
don't know if it will affect my credit because I got the credit under my
business name. This card does not show up on my personal credit file. What
should I expect will happen if my company cannot meet the obligation anymore? -- Rick
Hey Rick,
Whether any unpaid business debt impacts your personal credit score depends on the agreement you established with your card issuer.
Similar to your
personal credit score, your company's business -- or commercial -- credit score is a
number that indicates the risk involved in doing business with your firm. Your
company's bill payments are one of the factors used in the calculation of that
number. Your personal credit relationships, meanwhile, are typically considered
separately, which is likely why that business credit card doesn't appear on
your personal credit report. Since FICO's scoring model only considers the credit history that
appears on your personal credit report, that business card won't factor into
your FICO score, as long as it's absent from the report.
"Because
it's a commercial relationship, there shouldn't be any rebound effect on
their consumer report," says Dan Meder, vice president of business
information services at credit bureau Experian. (Along with commercial
information firm Dun & Bradstreet and fellow bureau Equifax, Experian is
one of the three leading business score issuers.)
However, that line
between business and consumer credit can get blurred. Think back to when you
applied for your company plastic. At that time, you may have given your
personal guarantee on that corporate card, essentially making
you a co-signer, contractually responsible for any debts your business incurs. In
addition to putting your personal finances on the line, that guarantee also puts
your personal credit in jeopardy. "It would not be unusual to see the
[commercial] information on his credit report, particularly if he is a small
business owner and signed personally for the card," says Steven Katz,
spokesman for credit bureau TransUnion.
American Express,
for example, says that liability varies depending on the specific card product
and determines whether the card's payment information appears on your business
or personal credit report. "Some products offer 'commercial
liability,'" which means that the company is held liable. Some products
offer 'joint and several,' which means that the individual business owner and
the business are held liable," says Rosa M. Alfonso, a spokeswoman for
American Express OPEN, a division that caters to small business owners. "OPEN
Small Business products offer 'joint and several'" liability, Alfonso says
in an e-mail. Discover takes a different approach: requiring all applicants for a business credit card to provide a personal guarantee.
The fact that
this business card isn't presently on your personal credit report doesn't mean you
are in the clear, especially if you stop making payments. "Even if the
item is not currently appearing, it may at a future date if the item is
assigned to collections," says Katz. Additionally, if a court judgment is eventually
issued against you, it could appear as a public record item on your credit
report.
Here's how to
minimize any damage resulting from an unpaid business debt:
Let your lenders know. If cash flow issues or other problems are making payment impossible,
contact lenders and other businesses to warn them they may stop getting
payments from you. Then, try to find a solution that works for both parties,
such as reduced monthly payments. Also, find out how lenders plan to report your
unpaid debts.
Continue to make pay on other debts. Should you have enough money to meet your other financial
obligations, continue to make on-time payments. Otherwise, the
damage to your credit score will be increased by multiple delinquencies.
Keep business and personal charges
separate. Experts say the use of a business card for personal
spending can give the lender some legal leverage, so avoid mixing the two types
of charges. "If he has not already done so, he should segregate his
personal use from business use," says Atlanta-based attorney Jonathan Ginsberg.
Check your personal credit report. Regularly monitor your credit report for any business payment information
that could appear. While a personal guarantee determines whether your
FICO score falls, lenders can make mistakes. Should business information show
up erroneously (such as if you didn't provide a personal guarantee for the
card), use the regular dispute process with both the lender and credit bureau
to get the items removed.
-- Jeremy
See related: 5 things you should know about business credit scores, Consider these options before co-signing for a card, Business credit scores: What they are, how to boost yours, FICO reveals how common credit mistakes affect scores, How to dispute credit report errors
Jeremy M. Simon is a former CreditCards.com reporter who wrote about credit scoring, economic data, credit card crime and other issues. He is based in Austin, Texas. He is a graduate of Vassar College and has previously worked for Thomson Financial in New York City, where he wrote about the stock markets, and Texas Monthly, as well as several publications in Austin.
Send your question to The Credit Score Report.
Published: February 16, 2010
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