Do business credit cards affect personal credit?

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The rise of the gig economy, freelance workers and side-hustles spawned an increased need (and opportunity!) for workers to use credit cards for their business.

Whether you operate as a sole proprietor Uber driver or seller on Facebook Marketplace, using a personal credit card for business is as simple as swiping, tapping, inserting or typing in the digits. Officially, most businesses that you can run from your home can operate with your personal credit card. It gets fun reconciling your business expenses and personal expenses come tax time, but, technically, you can do it.

Whether using a personal credit card or a small business card, you need to think about how either could affect your personal credit when using it for business expenses, because they can. So let’s take a look at the pros and cons of a number of approaches, as well as whether you can avoid the impacts altogether and apply for a card not tied to your Social Security number.

What impact does using a credit card for business expenses have on your credit score?

As a sole proprietor, banks and other lenders generally see your personal and business credit closely related. Unless you have an EIN (employer identification number) and established business credit, you’ll use your Social Security number to apply for both personal and small business credit cards. Now, many banks don’t report all of your activity with a small business card to consumer credit bureaus, so in those cases, your business card activity will have limited impact beyond your initial application and hard credit inquiry.

On the other hand, if you’re using a personal credit card to fund your business expenses, you can expect that activity to show up on your personal credit report.

Here are three ways using consumer cards for business expenses can affect your personal credit score:

1) It can affect your credit utilization ratio

Credit utilization refers to the percentage of your available credit you use monthly. If you have total available credit of $5,000 and you charge $3,000 in expenses monthly, even if you pay it off each cycle, that’s a credit utilization rate of 60%, which can hurt your credit score.

WORD OF CAUTION

Each issuer reports card balances to the credit bureaus at different times. That means your large balance could be reported to a bureau even if you pay it off monthly. Here’s an example:

Let’s say you have a monthly business expense of $5,000 that you charge to a card with a $6,000 credit limit. On the first of each month, your bank reports that $5,000 balance to the credit bureaus, and around the 10th of the month, a few days before your due date, you pay off the balance entirely. Even though you pay off the card each month before the due date, the credit bureaus record a monthly credit utilization of 83%, which is very high.

Are you frequently charging for car washes and fuel to support your Uber side hustle? If you bake, are all your ingredient purchases on your card? Do you have multiple business subscriptions paid monthly on that card or rental property maintenance costs you usually charge? It could all add up to substantial credit utilization.

Credit agencies consider 30% or less utilization to be ideal. If using a credit card for business pushes you to 30% or 50% or more, it can lower your credit score.

2) Late payment can hurt your credit

Credit agencies don’t care whether your charge at Big Tire Place was personal or for business. If your payment is late, your credit score can take a hit. If you are three cycles late, your score can fall by as much as 180 points — a ding that stings, and lasts for a long time.

For small business owners, solopreneurs and gig workers, managing business cash flow is directly connected to personal cash flow. Pay attention to your credit card statements and make your payments early or by the due date to keep your score high. Remember that a slow month of business revenue doesn’t change that your credit card bill is due on time.

➤ LEARN MORE:Why payment history is such an important part of your credit score

2) Closing your business can complicate things

If you’ve been using a credit card for business expenses and you shutter your business because of a full-time job offer that meets your financial needs or for any other reason, what should you do with the card? Should you close it?

In addition to utilization (see above), length of credit history affects your credit score. Imagine you have max credit available of $20,000, but $15,000 is on a single card. If you close that card, you reduce your max credit by 75% which will affect your utilization, possibly creating a situation that lowers your credit score.

Additionally, if the card you used in your business is the card you’ve had the longest, closing it shortens your credit history, potentially lowering your score. It may be wise to keep the card open, even if you never use it, to keep a higher score.

➤ LEARN MORE:How to cancel a credit card

“Well,” you might ask, “if using my Social Security number and personal credit history to get a card for business can affect my credit, can I get a credit card for my business that doesn’t connect to my personal credit score?”

Yes. And there are a couple of options to consider.

Primarily people who don’t have a Social Security number, that is, non-US citizens, are those who can possibly qualify for a card without one.

People living in the United States who do not have a Social Security number can often get a credit card after securing an ITIN, which is a taxpayer number given by the IRS to people like international students, immigrants and some visa holders.

➤ LEARN MORE:Guide to getting a credit card for foreign students, immigrants and H-1B visa holders

Securing a credit card without a Social Security number is not the norm for U.S. citizens because your Social Security number is the data point that connects all your credit history. That’s why you are always asked for it when taking out a loan or applying for a credit card.

Getting a business card without your Social Security number will usually mean having two things:

An EIN (Employer ID Number)
Established business credit

Even if you operate your business using an EIN for banking and tax reporting, it’s still tied to your Social Security number, so having one will matter. The difference is most issuers don’t report all activity on business credit cards to the consumer credit bureaus, so your small business credit card will affect your business credit instead of your personal credit. If you don’t have an EIN or established business credit or you really want to avoid a hard credit inquiry on your personal credit, your best option is to apply for a credit card that doesn’t require a Social Security number.

It isn’t impossible, but it is difficult.

Ramp offers a charge card connected solely to your business. They promise “No personal credit checks or founder guarantee.” Sounds good, right?

Except you need tens of thousands of dollars in assets in order to qualify.

Another card that doesn’t require a personal guarantee is Brex, a business solution services company of which their credit card is one part. Brex, too, is for established businesses with >$1 million in annual revenue and more than 50 employees.

Neither is much of an option for the average freelance writer or eBay reseller, though. Which leads to your single best option for separating your personal and business expenses and credit impacts.

The best credit card option for small business owners and sole proprietors

You might have guessed by now that the best option for your small business is a small business card that you dedicate only for business use and use it responsibly. Better still, make sure it’s a small business card that doesn’t generally report activity to personal credit bureaus.

Besides avoiding the expense of forming and LLC or incorporating, there are a few additional possible benefits:

1) Build your business credit score

As you are building your business, you can work on your business credit score. As long as you make your payments on time and manage your card responsibly, you build credit.

Down the road, you may need to take out a traditional small business loan and having established business credit could help you take that step.

2) Earn rewards on business expenses

If you use a rewards card as your dedicated business card, the points or cash back will accrue faster since your business purchases run through that specific card. Paying for office supplies, fuel, meals, equipment, travel and more on your dedicated card rewards you as a byproduct simply doing business.

Remember there are tax implications when it comes to credit card rewards and business deductions, so be sure to talk to your tax adviser.

➤ LEARN MORE: Guide to credit cards and taxes

Whether it’s for your business or a personal card, having too many credit inquiries in a limited period of time can lower your credit score and cause lenders to see you as a risk. If your business income hasn’t changed substantially, yet you apply for an additional $25,000 in credit cards, you could appear as a risk to lenders who can’t predict whether you will max them all out.

3) Maximize card benefits as a part of your business credit strategy

“Credit options for small businesses can be a lifeline,” says Ken Holland, a Texas-based financial adviser. “A small business loan or line of credit can help finance an expansion or large capital expense, but a credit card used for business and paid on time can be a great benefit to help a small business owner smooth out cash flow.”

As your business grows, you can think about taking out small business loans and working toward establishing a business credit score to eventually fully separate your business and personal credit. In the beginning, though, many small business owners will find a small business card guaranteed by their personal credit history will be the best option.

Whether you choose points, cash back, or zero interest balance transfers, there are many excellent options for cards to help you reach your business goals.