Whether you have a side gig or run a small business full-time, business credit cards can offer you spending power and rewards that align with your expenses – but they might also come with potential drawbacks. Here’s what you should consider before applying for a business card.
Both business credit cards and personal credit cards can make charging purchases and earning rewards more convenient. On the surface, they might seem the same, but there are several things that separate business cards from personal cards.
If you’re interested in getting a business credit card, these tips can help you understand the differences between the two.
Business credit cards are designed for business use
If you’re opening a business credit card, you should either already have some sort of business or be planning to start one. The good news is that credit card companies can offer some flexibility in what constitutes a business.
For example, you don’t necessarily need to have an Employer Identification Number (EIN) or be incorporated to be approved for a business card. It’s possible to get one even if you only have a side hustle or work as an independent contractor.
One thing you might be wondering is whether you can use a business credit card for personal spending. You can, says Brian DeChesare, founder of finance blog Mergers & Inquisitions, but you shouldn’t.
“When preparing your taxes, you’ll have to analyze a year’s worth of transactions one by one,” says DeChesare.
Not only is that time-consuming, but it can make reporting deductible expenses tricky. And claiming personal expenses as a business deduction could accidentally land you in hot water with the IRS.
If you’re considering merging business and personal expenses on the same card, make sure you have a good accounting system in place, says Spencer Reese, author of “The Military Money Manual: A Practical Guide to Financial Freedom.”
Business credit cards can also be helpful in establishing and building business credit. Your card issuer can report your account history to the business credit bureaus, which can be instrumental in developing a good business credit score.
Rewards and bonuses align with how you spend
Business and personal credit cards can offer rewards and introductory welcome bonuses, though they aren’t always alike.
- The Chase Ink Business Cash® Credit Card, for instance, earns businesses 5 percent cash back on the first $25,000 in combined purchases at office supply stores and on internet, cable and phone services each year.
- The Chase Freedom℠ Flex, which is a personal card, offers 5 percent cash back on up to the first $1,500 each quarter in different bonus categories following activation, which in the past have included department stores, grocery stores and gas.
That’s another reason why it makes sense to keep business and personal spending separate. By tailoring your spending to your card and its associated rewards categories, you have the best shot at maximizing your rewards earnings.
In terms of welcome bonuses, they can sometimes be more generous for business cards, says Reese. But consider what you need to spend to qualify.
For instance, the Capital One Venture Rewards Credit Card features a welcome bonus of 75,000 miles if you spend $4,000 on purchases in the first three months of account opening. But to qualify for the 50,000-mile bonus with the Capital One Spark Miles for Business, you need to spend $4,500 within the first three months.
Interest rates, fees and APR offers aren’t identical
Both personal and business credit cards can charge interest and fees. The difference is that some business credit cards carry higher annual costs.
Jeff Rose, a certified financial planner and founder of Good Financial Cents, says many business credit cards waive the annual fee the first year, but that you shouldn’t overlook that fee when choosing a card.
“You will eventually have to pay it, which is something to think about if you don’t make a lot of purchases,” he says.
The card’s APR is another consideration. If you think you’ll carry a balance at any point, the interest charges could increase your business debt.
“Paying interest on purchases makes your rewards card not very rewarding,” says Rose.
You can sidestep that by choosing a card that has an intro APR offer — meaning you don’t pay interest for a specified amount of time, which often lasts a year or more. It is essential, however, that you make a plan to pay off your debt before the intro APR offer ends.
In addition, a business charge card is an alternative to consider if you’d prefer to avoid interest charges. Since these cards require you to pay in full each month, you won’t pay interest on what you charge. The trick is to make sure you’re only charging what you can afford to pay off at the end of the month.
Business and personal cards offer different perks
Like rewards and welcome bonuses, business credit cards can diverge when it comes to perks and benefits. Again, the emphasis is on providing benefits and features that are valuable to businesses versus everyday spenders.
Personal cards often come with benefits such as purchase protection, travel insurance and zero liability fraud protection, says Reese. Business credit cards tend to emphasize other benefits, such as expense management controls or discount programs that can save your business money.
Personal and business credit cards have one thing in common regarding perks: the higher the card’s annual fee, the better they tend to be.
- Both cards offer up to a $200 annual airline fee credit for incidentals, airport lounge access and another fee credit toward Clear annual membership.
- The Business Platinum card also includes concierge service and a 35 percent points bonus on Membership Rewards points after you use the Pay With Points feature to cover all or part of a flight booked with American Express Travel (on up to 500,000 points per calendar year).
Business cards may offer more spending power
When opening a new business or personal credit card, your first question may be how much credit you’re approved for.
DeChesare says that with business credit cards, the limits are typically much higher than personal cards, and for good reason: “That provides the business with access to emergency financing.”
Having higher limits on a business credit card makes sense, since businesses may charge more on average each month than the everyday person. Individual credit limits for business or personal cards typically depend on your credit score and financial profile.
If you have a brand-new business, for example, it’s likely you’ll have a lower credit limit to start. But overall, you may have more room to spend with a business credit card than you would a personal card.
There are some personal and business charge cards that have no preset spending limit. This means that instead of having a fixed credit limit, the amount you can charge each month fluctuates based on account activity and credit history.
That’s convenient, but again, how you use your spending power with a credit card matters.
“The cons of a personal credit card are similar to that of a business card,” says Rose. “If you don’t make a habit of paying off your balance each month, it can easily get out of hand.”
Card protections aren’t the same
One last thing to know about business versus personal credit cards is how you are (and aren’t) protected when you spend.
“Business credit cards have higher limits, but they also have higher fees and fewer protections,” says DeChesare. “For example, the issuer of a business card can increase your APR out of the blue. That isn’t permitted with a personal credit card.”
While some business credit card issuers have opted to extend consumer benefits outlined in the 2009 CARD Act to business cards, not all of them have. For that reason, it’s important to carefully research a business credit card’s protections, features and benefits before applying.
Understanding the differences between business and personal cards can help you choose the card that’s right for your business and your personal spending. It’s essential to keep your business and personal spending separate by keeping your company charges on a business credit card.
Your business credit card can affect your personal credit, so you should view paying your business card on time, every time as just as important as paying your personal card. That way, you’ll improve your business credit score and not do damage to your personal score.