I recently came across a situation that I felt would be a great example to share with business owners. The business owner I know, who has owned a real estate investment company for a long time, has been using his personal credit cards for business transactions and expenses. While this seemed like a good idea in the past, with the changing economy and creditors tightening restrictions on approving financing, now it’s costing you dearly.
When a consumer has excellent credit scores and begins to use personal credit cards for business reasons, they will find themselves with constantly fluctuating credit scores. As balances increase above 10% of limits, scores begin to drop. The closer the balance gets to the limit, the lower the score.
For example: Let’s take a personal Amex card that has a limit of $10,000 (as opposed to unlimited Amex cards that would not affect the score). If at one point the balance was $9500 and the business owners credit needed to be drawn for a real estate transaction, your score could drop anywhere from 50 to 70 points. That’s a lot of points to lose when looking for the lowest interest rates on a 15- to 30-year loan. For my friend, the Real Estate Investor, it is more important to him than most to keep his scores at his best all the time. But any business owner must protect and separate his personal credit from his business credit, especially if he wants to buy a home and get a mortgage. Even keeping interest rates low on personal credit cards is easier when balances stay low.
Most people don’t realize how much balances on revolving credit (any credit where you can pay the minimum and collect the maximum) affect scores. The other factor is that just because you pay off the balance doesn’t mean your score will go up right away. The creditor must update the change with all three credit reporting agencies, Trans Union, Equifax and Experian before it is reflected in the scores. Updating costs the creditor time and money, so it may not update for months in some extreme cases. The real estate investor had to update his balances directly with the credit reporting agencies, to ensure that when the bank put out the report next week, it would reflect the score increase needed to get the loan approved.
This is where business credit cards work wonderfully. Although you have to sign in person for business credit cards, they are generally not included in your personal credit profile unless you default and they become charge-offs (credit that is not paid and is considered a charge). In addition to high balances, the opening and closing of credit also have a detrimental effect on scores. During the first year a card is opened or closed, scores can drop as much as 60 points. Therefore, business credit cards give a business the opportunity to charge credit cards, carry high balances, and open and close credit without worrying about how it will affect the personal credit scores of business owners. This is a great asset for any business owner who is constantly charging business expenses to credit cards. I know some small business owners who have a business charge of $100,000 and more on credit cards many months of the year. In today’s environment it is much easier, and in many cases mandatory, to use credit cards.
The key is that before applying for business credit, a business owner should make sure they have very good, if not excellent, business and personal credit scores. Creditors who underwrite business credit cards will review both personal credit scores and business scores and ratios as well. The most popular business credit bureau is Dun and Bradstreet, but there are many. It’s amazing how much information these credit reporting agencies collect on all businesses. Across the more than 100 million businesses Dun & Bradstreet tracks worldwide,* “it makes more than 1.5 million updates to our database daily. They could be major transactions like paying vendors or making lease or mortgage payments But it could be seemingly smaller transactions such as equipment leasing, advertising, parcel shipping, or insurance underwriting.” The good news is that just like personal scores, business credit can also be improved and improved with the right tweaks, knowledge, and wisdom. To learn about your business credit, you can purchase your credit report and scores on the Dun and Bradstreet credit site. Look for the small business tab. The comprehensive credit report is, in my opinion, the best information for the price.
* Nancy Castleman – Co-author of “Invest in Yourself: Six Secrets to a Rich Life” and founder of Good Advice Press