Does a Business Credit Card Affect Personal Credit Score?

It's no secret that side hustlers and small company owners prefer to use business credit cards because they make it easier for them to handle their funds effectively and because they help with tax preparation. Some business owners even think it's crucial to keep personal and professional costs apart. But have you ever questioned whether your company credit might affect your credit history or credit score (CIBIL)?

It won't matter if you keep your personal and business costs separate. Unfortunately, they have a relationship and can have an impact on one another. Few credit card providers submit business credit card accounts to consumer credit agencies, which suggests that how you manage your company credit card might affect your credit score. This is a truth that many individuals are unaware of.

Here, we'll examine how business credit cards may impact your credit or CIBIL score, and what you can do to effectively manage it.

Does a business credit card impact your credit score?

When you apply for a small-business credit card, the card issuer usually conducts a hard enquiry, which can temporarily lower your credit score. However, the impact is usually minimal and short-lived. 

Credit card issuers often use your credit as a deciding factor for approving business cards and they typically require a personal guarantee in case your business cannot repay the debt. This is because your personal credit history helps issuers evaluate the level of risk involved. 

Most business credit cards won’t show up on your credit report unless there is a negative payment history. This means that your business credit card activity won’t impact your credit score unless you miss payments or default on your card. It is important to be aware of this distinction and ensure that you manage your business credit card responsibly. 

Late payments and serious delinquencies on business credit cards can have a detrimental effect on your credit score. It is important to stay on top of your business credit card payments to avoid any negative impact on your personal credit history. Be sure to prioritize timely payments to protect your credit standing. 

Here are some possible effects of using a business credit card on your credit score and report as a whole.

• A Strong Pull: The credit card providers will take into account two things after you have successfully applied for a credit card: the track record of your company and your total credit report. As was already indicated, the lender will perform a hard credit draw on your credit history, which might lower your CIBIL or credit score.
• Annualized Returns: The calculation of annualised returns is done on an annual basis. But, it is based on the effect of compounding rate of interest. For instance, if you invest a sum of Rs.1 lakh in a mutual fund which has raised to Rs.1.5 lakh in 3 years. The absolute return stands at 50%, but the annualized return is 125 due to the compounding effect.
• Informing a Delinquent Account: It's possible that many issuers of business credit cards won't disclose your account activity to the three major credit agencies. However, they could report on your account if you don't make payments, often for much over 30 days. As a result, it may harm your credit or CIBIL score, and it remains on your credit record for an extended 7 years. Additionally, it can affect your future capacity to borrow money.
• Credit Utilization: Did you know that certain credit card issuers report all of your credit activity to the three main consumer reporting agencies? You did read that correctly. Even your credit utilisation ratio is included. As a result, carrying a large load on your company credit card might negatively impact your credit score.

The overall credit utilisation on your credit cards should be lower than 30%, according to experts, to keep your credit ratings sky-high. The good news in this situation is that corporate credit cards sometimes have credit limits that are greater than consumer credit cards.

How can you utilise a business credit card while improving your credit?

Let's look at how you might strike a balance between the two now that you are aware of how a company credit card can impact your credit score.

• Monitor your Credit Rating: It is essential to check your credit score frequently. Additionally, it is strongly advised that you check your company credit score in addition to your credit score if you have a business credit card. In this manner, you may see exactly where you are with the commercial and consumer credit reporting agencies and try to raise your credit score and report.
• Make Payments on Time: This is a no-brainer. Your credit score is heavily influenced by your payment history, so you must be mindful of it. Always be sure to pay off the minimum balance on your credit card, if not the whole amount owing, to raise your CIBIL score. However, paying off the whole balance will save you from having to pay a high-interest rate.
• Avoid Bad Personal Credit Practices: As everyone is aware, using a company credit card might affect your credit or CIBIL Score. But were you aware of the other viewpoint? Simply put, your business credit may be equally impacted by your credit behaviours. It could be challenging for you to receive a company credit card if you have poor credit or a low CIBIL score. Build your credit history accordingly so that banks cannot ever reject your application for a business credit card.
• Aim to Have a Little Balance Each Month: You must maintain low credit utilisation to raise your credit score or CIBIL score, thus you must strive to keep your credit card balance low. You can pay in numerous monthly instalments or use your credit card less frequently to get there. Additionally, don't worry if your credit utilisation suddenly increases. Once your full debt is paid off, everything returns to normal.

What are the Strategies to Maintain a Healthy Credit Score?

There are various ways to improve your credit score like - 

• Pay bills on time to improve credit score. Late payments harm the credit score. Use reminders or automatic payments to stay on track. 
• Keep credit card balances low, below 30% of the limit to manage credit well. Pay off balances or make a plan to reduce debt near the limit. 
• Regularly check your credit card report. Inaccuracy can hurt your credit score. Thoroughly examine and correct the errors to maintain a healthy credit score. 
• Develop a strategy to pay down debt by focusing on creating a realistic plan and using the “Snowball” method to pay off high-interest credit cards systematically.
• Using credit responsibly boosts credit scores. Timely payments and spending within means demonstrate creditworthiness. Inactivity or no credit cards is not beneficial. Responsible usage raises credit scores. 
• Avoid opening multiple credit accounts at once to prevent lenders from viewing it as a sign of excessive debt and high risk. Opening new accounts also lowers the average age of existing accounts, potentially damaging your credit score. Be cautious and only open new accounts if you can manage them effectively.
• Closing credit card accounts, even with a zero balance, can hurt your credit score. Closed accounts still appear on your credit report and affect your credit history. Furthermore, closing an account might lower your balance-to-limit ratios, which can negatively impact your credit score. Consider the consequences before closing a credit card account.
• Time your loan shopping within a focused period to minimize the impact on your credit score. 
• Be selective when opening new credit amounts to avoid financial burden and credit score damage. Only open necessary accounts and manage them responsibly
• Seek professional guidance if struggling with credit or finances. A credit counsellor or financial advisor can provide valuable help with short and long-term financial goals. It sets you on the path to long-term stability

The Conclusion

It's not a terrible idea to apply for a business credit card for your firm, but it's important to understand how business credit cards might impact your credit score and, eventually, your credit report. Practise solid credit practises as well, since doing so will undoubtedly help you improve your credit score and grow your company.

Frequently Asked Questions (FAQs)

Q: Do business credit card activities affect my credit score?

A: Responsible use of a business credit card usually does not affect your credit score. These cards report to business credit bureaus that assess your business’s creditworthiness. 

Q: What happens if my business fails and I have a personal guarantee on the business credit card?

A: If your business fails to repay the credit card debt and you have provided a personal guarantee, the credit card issuer may go after your assets. This could mean they may seek to garnish your wages or even foreclose on your personal property. 

Q: Can I become an authorized user on a business credit card and improve my credit score?

A: Being added as an authorized user on a business credit card typically won’t have a significant impact on your credit score. This is because business credit card activity may not always be reported on personal credit reports. However, if the card issuer does not report to personal credit bureaus and the card has a good payment history, it could slightly improve your score. 

Q: I'm an employee of a company that issues corporate credit cards. Will using a corporate card affect my credit score?

A: corporate credit cards are usually not reflected on your credit score because they are issued to the company and not to individual employees. It is important to familiarize yourself with your company’s guidelines on using the corporate card responsibly to avoid any potential repercussions for misuse. 

Q: Is there a specific type of business credit card that minimizes the risk to my credit score?

A: Secured business credit cards are a good option for business owners with poor personal credit scores. By offering an upfront security deposit, these cards provide a way to build or rebuild credit without risking personal assets. Additionally, the approval process is typically easier, as it is based more on the deposit amount than on personal credit history.