Some consumers have found they can benefit from using a business credit card even if they don’t own a traditional business. Not sure if it makes sense for you? Here are the pros and cons.
A business credit card can be a godsend for entrepreneurs trying to manage cash flow.
Some consumers, however, have found they can also benefit from using a business credit card even if they don’t own a traditional business.
Though no rules prohibit consumers from getting a business card if they qualify, said Nessa Feddis, senior vice president of the American Bankers Association, there can be some downsides to doing so.
Not sure if it makes sense for you? Here are the pros and cons to help you decide.
See related: How to get a business credit card
Pro: You can benefit from more favorable terms
Business cards often have better terms than their consumer counterparts. Some cards may offer flexible payment options in recognition of the fact that many businesses experience cashflow problems.
By using a business card, a consumer can take advantage of these more flexible terms, but that comes with a caveat. It may be harder for a consumer to qualify for a business card with a very high credit limit without some business income to back their application up, Feddis said.
Pro: You can benefit from the rewards
For some, the richer the rewards the better. If a business credit card happens to offer the best rewards, why not take advantage of it?
That’s the philosophy of Ian Aronovich, co-founder and former CEO of GovernmentAuctions.org, a website that compiles information about government auctions of seized and surplus merchandise across the country.
“After I accrue points, I transfer them to airlines and hotels for free flights and stays on my vacations,” Aronovich said.
Pro: It can help your personal credit score
It’s up to card issuers to determine whether they report a business card on your personal credit report and not all card issuers do, said Anthony A. Sprauve, former spokesman for FICO.
Of course, if an issuer reports it, “It can affect the consumer’s FICO score as any other account would,” Sprauve said. If not, if you run up a balance on a business card, that debt doesn’t factor into your personal credit score.
On the other hand, when you amass debt on your personal credit card, it always impacts your personal credit rating and “becomes something that takes away from your overall capacity to borrow as a consumer,” said Joel Pruis, former senior business consultant for credit reporting company Experian.
While it’s never a good idea to run up credit card debt, by using a small business card that doesn’t report to the credit bureaus you could carry extra debt without it affecting your personal credit score.
Con: It can hurt your personal credit score
Using a business card for personal purchases can also hurt your personal credit score if you run up the balance so high that you cannot pay the card off.
Many issuers require a personal guarantee before approving an applicant for a business credit card, which means the cardholder is personally liable for the debt. In that case, if you default on a business card, it would then be reported on your personal credit report and bring down your score.
Con: You don’t have the same consumer protections
The Credit CARD Act of 2009 brought a number of card protections to consumers. Among them: Consumers would no longer be subject to instant rate hikes as card issuers have to give cardholders 45 days’ notice of a rate increase for new charges. Likewise, certain fees, such as late charges and over-limit charges, have been capped. But business credit cards were excluded from the CARD Act and do not get the same protections.
Some card issuers have voluntarily extended the same protections to their business credit card customers, said Molly Brogan Day, vice president of public affairs for the National Small Business Association.
“If credit card companies get to the point where they’re feeling pinched or need a new source of revenue,” there’s always the chance that can change, she added.
For that reason, the National Small Business Association has over the years urged Congress to extend the protections of the Credit CARD Act of 2009 to the small-business cards of employers that have 50 or fewer employees.
See related: 10 things to know about business credit cards
Con: Business cards can be more costly and less consumer-friendly
Business cards are designed with the small-business owner in mind, so they typically offer features – such as more detailed expense tracking and spending reports – that “might not be particularly interesting to a consumer,” Feddis pointed out.
If the business card comes with an annual fee or a high interest rate, the consumer could end up paying for features they’re not even using. Consumers might find that business-oriented features, such as an online payments interface with multiple features, may be more complicated than they want.
There’s nothing stopping a consumer from getting a business credit card. The question is whether the perks truly give you an advantage. Weigh your pros and cons carefully to make the right decision for your financial health.