Will your business credit hurt your personal credit?
This is a very common question I get asked by my small business clients, especially those who are new entrepreneurs needing funds to pay for initial startup expenses.
Whether your business credit will appear on your personal credit depends on several important factors and how you are listed on the loan.
The general rule of thumb:
If you secure any debt under your personal name, it may affect your personal credit.
Generally, your business and personal credit may be affected if you are listed as the guarantor or cosigner on the business’ credit line and the account is under your name and the name of your business.
If you are a new business owner and do not have any credit history under your business name, when you apply for a business credit card or loan, the creditor will most likely look at your personal credit history to determine whether it will issue you the credit card or loan.
Typically, the business credit history of small business owners - particularly solo entrepreneurs - will show up on their personal credit reports since they have little to no credit history. As a business owner, it is almost impossible to completely separate your personal from your business credit since most financial institutions will require you to secure the debt with personal guarantees.
It’s best practice to keep your business transactions distinctly separate from your personal transactions to limit your risk; the most efficient way to do this is by having a separate business credit card to charge all your business expenses. Your personal expenses should only be charged on your personal credit card, not the business’. This becomes more important if you wish to establish business credit history separate from your personal in the long-run.
Furthermore, some creditors will only report your history to the commercial credit bureaus instead of the consumer credit bureaus. In short, creditors report your personal credit history to the consumer credit bureaus and your business credit history is reported to the commercial credit bureaus. When you apply for a business credit card or loan, ask the financial institution whether they report your business credit to both commercial and consumer credit bureaus.
Best practices tips:
- Have a separate business credit card you use to charge all business expenses.
- Do not commingle your business transactions on your personal credit card.
- Review your personal credit score and report each year to make sure there is no abnormal activity.
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