Nurturing a startup or managing a small business requires good strategies in order to avoid financial mishaps. A small business credit card can be a great tool for organized owners, because they help separate work and personal finances, and many offer rewards.
While it’s important to distinguish between business and personal expenses, they can never be completely independent of each other, and it’s crucial to understand how a business credit card can affect you beyond your business.
1. Small business credit cards impact your personal credit.
Because the small business credit card is in your name, its activity is tied to your credit report. But not all small business cards work the same way.
“All small business cards will report information about the account to the owner’s personal credit reports if you default on the account,” said Gerri Detweiler, director of consumer education for Credit.com. “But few will report all activity to the owner’s personal credit reports.”
That means the good behaviors associated with that card may not help build credit. If that’s something you want out of a business credit card, prioritize getting one that reports all activity. On the other hand, if you expect to carry a balance occasionally, a card that doesn’t report regularly may offer an advantage.
Some small business cards have perks, like rewards, but just like with personal cards, a rewards card shouldn’t be used while in credit card debt, because they can encourage spending you may not be able to afford. Debt on a small business card can be as burdensome as a personal account with debt.
2. Terms are different from personal cards.
One of the big distinctions between small business credit cards and personal ones is that business cards are not covered by the regulations outlined in the CARD Act of 2009. The act led to a lot of improvements to personal cards — like reduced fees, restrictions on penalties and consistent billing cycles and due dates.
“Some issuers have voluntarily extended some of the CARD Act protections to these cards, but not all,” Detweiler said. “So you absolutely must understand what happens if you pay late, for example.”
Going back to the first point, if you don’t stay on top of your small business card’s terms, you could subsequently incur fees or a higher interest rate.
3. You might not be protected from fraud.
Given the prevalence of credit card and identity theft, all consumers need to be proactive in protecting their finances. It’s easy to spring into action if someone steals your wallet, but nearly half of credit card fraud happens without the physical card, meaning someone could be illegally using your card while it’s in your pocket.
Many card issuers work to detect theft, but cardholders need to watch their accounts so suspicious activity does not go unnoticed. Regularly reviewing credit reports and watching credit scores for sudden changes can also help individuals spot something amiss. (There are free options to do both, by getting your government-mandated free annual credit reports, and checking your credit scores using a free tool like Credit.com’s Credit Report Card.) As important as this is for consumers to add to their financial behaviors, small business cardholders need to be even more vigilant.
If a consumer’s personal credit card is used fraudulently, he or she typically won’t be held responsible for those transactions. The same isn’t always true for small business cardholders, which is why having one is a great responsibility. For example, if employees have access to the account, the owner should watch the activity closely and choose authorized users carefully, because he or she will be on the hook for whatever that employee purchases with the card.
As with all financial decisions, research plays a central role in making the right choice, and consumers need to ask themselves how they will use the tool to strengthen their finances. If choosing a financial product isn’t going to contribute positively to your financial picture, it’s probably not worth pursuing in the long run.