In this article:
As a small business owner, you probably have both a personal credit card and a business credit card. However, when money is tight and payments for each are coming due, you may have to weigh which account should take precedence.
Managing all credit cards according to your agreement with the card issuer is the best way to protect your credit, and there are some differences between personal and business credit cards to consider when making money decisions. Here's how to deal with debt on business and personal cards.
What's the Difference Between a Business and a Personal Credit Card?
Business credit cards are designed to help you finance entrepreneurship, though they do not shift responsibility from you to your company. In fact, most issuers embed a personal guarantee into the agreement that permits it to hold you liable for repayment of any debt you accrue with the card, even if all the charges were for your business.
Business credit cards may be reported to commercial credit bureaus, such as Experian Business and Dun & Bradstreet, as well as the three major consumer credit reporting bureaus—Experian, TransUnion and Equifax.
Personal credit cards, on the other hand, are for individuals to use. Your name is associated with the account, and as the owner you are fully responsible for the payments and debt. Personal credit cards can only be listed on your consumer credit reports, so they will have no direct impact on your business credit.
Personal credit cards are also covered by a number of consumer protection policies that don't apply to business cards. The Credit CARD Act is a federal law that was designed to protect consumers, but it only applies to personal credit cards. Among other things, it requires credit card issuers to communicate interest rates clearly and consistently, and to provide advance notice if they plan to change rates.
What Happens if You Don't Pay Your Business Credit Card?
If you fall behind on your business credit card payments, you will be assessed a late fee, and the issuer can increase your APR without delay. This "penalty rate" may apply to your card indefinitely, potentially making a big difference in how much you'll pay to carry a balance. The issuer can also lower your credit limit if it chooses.
Late payment notices will appear on any credit report the issuer sends information to, which can affect not only your business credit rating but your consumer credit as well. If the debt remains unpaid, the account may be suspended or closed and sent to collections. The card's issuer or a collection agency may also pursue legal action. Any business partners on the account will experience the same credit and legal consequences.
Not having access to your business credit card can be serious. If you're like many small business owners, you rely on credit to keep your operations running smoothly. You may need easy access to a high charging limit to do things like purchase expensive machinery or buy products in bulk, and then pay over time. Without the ability to borrow using your business credit, you may be in a bind the next time cash runs short.
What Happens if You Don't Pay Your Personal Credit Card?
Just like a business card, not paying at least the minimum payment on your personal card can have some major, and immediate, consequences. Penalties can apply after just one day and include a late fee, a penalty APR on new purchases or promotional 0% interest offers being rescinded.
As payments get later, consequences get more severe. When you start missing 30-day billing cycles, the issuer can note payments as delinquent on your consumer credit reports. After 60 days, the issuer can apply the penalty APR to your card's total balance, though it's required to revert to the original APR if you pay on time for six months after that.
Personal credit card accounts face the same collection and legal consequences as business accounts.
What happens with your personal credit card affects only your consumer credit rating. But since lenders may check your consumer credit reports when you apply for business loans and credit cards in the future, your personal creditworthiness can still have business consequences.
What to Do if You Are Struggling to Pay Both
It's best to keep both business and personal credit cards in good standing if possible. Your first step is to determine if you can meet the payments by constructing a budget, then paring down spending or increasing income until you can bridge the shortfall. Try to stretch yourself so you can cover at least the minimum payments.
Still no way to satisfy your cards' respective payments? Call your credit card issuers and ask for help. You may be able to make lower or no payments for a few months so you can get back on your feet without any problems. If one issuer allows you to suspend payments without any negative effects, you can concentrate on another card that doesn't offer the same break.
Take a look at your finances beyond your credit cards and see where cutbacks can provide some extra funds. Remember, you don't need to completely pay off your credit card bill to avoid consequences; making even the minimum payment is enough to satisfy credit card issuers. If you still need to decide on paying one card over the other, consider the consequences.
If the account is jointly held and someone else will suffer if the account isn't paid as agreed, be sure to notify that person before it goes delinquent. They may be willing to step in and make the payments when you can't.
If you find yourself overwhelmed with credit card debt and none of the above measures are helping, try getting assistance from a professional. Credit counseling agencies exist to help stressed-out borrowers. A credit counselor can create a payment plan to help you stay on your feet while also paying your bills.
Monitor Your Credit Throughout the Process
Finally, keep an eye on your credit reports as you manage your debt. You'll want to see how payments are being reported, both good and bad. Obtain a free copy of your consumer Experian report or get a copy of your Experian business credit report to understand how your accounts are showing up. When you're in a stronger financial position, you will know what you need to concentrate on so you can raise your credit rating. As a small business owner, you'll want to do what it takes to build and keep great credit—with a business as well as a personal credit card.