When business owners are shopping for a small business credit card, I encourage them to look for one that does not report the account on their personal credit reports. This helps separate your business and personal credit, and protects your personal credit scores from any damage if you carry a balance on that account.
Capital One is one of the top issuers of small business cards, and until recently, did not report business credit card account information to personal credit reporting agencies. (That’s unless you default – almost all will appear on your personal reports if you can’t pay.) But Capital One has changed its policy and has begun reporting those accounts to the three major personal credit reporting agencies, Equifax Experian and Trans Union. That means small business credit cards now appear just the same as personal cards on business owner’s credit reports.
If you carry little debt on your Capital One small business credit card and pay the bills on time, this change may not affect your credit scores, and may even help. But if your business, like many, is experiencing cash flow issues and carries a high balance relative to the credit limit, this account can hurt your credit scores. That’s true even if you pay on time.
Keep in mind that your ratio of balances to credit limits on your credit cards (your utilization ratio) is an important factor when calculating your credit scores. Ideally you want to keep your card balances at 10% or less of your available credit. That doesn’t leave you with a lot of room to spend or revolve, and will be especially hard on business owners who have seen other access to credit dry up.
As we all know by now, if your credit score dips, your other card issuers may drop your credit limits or raise your rates for future purchases – at least until the consumer protections of the Credit CARD Act go into effect in February 2010. (As of this writing, October 2009, Congress is considering moving the effective date up to December 2009). Even after that law goes into effect you can find yourself with higher rates for new purchases or loans, and less access to credit in general, if your scores are low.
I am against this change for a number of reasons, not the least of which is the fact that small business owners may have chose this card precisely for the reason that they want to separate their business and personal credit. To change the rules right during the middle of the worse credit crunch most business owners have seen is unfair at best. Secondly, businesses that are incorporated and run professionally are legally separate entities. Their credit histories should be separate if they pay their bills on time. (If you default then a personal guarantee kicks in, and the account will be reported as late on your personal credit.) And what about a business owner who is trying to get a mortgage or car loan? Should they personally pay a higher rate because of the businesses’ debt?