Business mistakes shouldn’t impact your personal credit — unless you’ve provided your personal guarantee.
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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
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.
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