You’ll often need financing to accomplish your goals as a small business owner, and you should typically aim to secure it with good business credit. Not only is that necessary for the best business loans, but it also limits the risk to your personal credit.
However, your business credit can affect your personal credit even when you open your commercial accounts in your company’s name. Here’s what you should know about the relationship between the two types of credit to avoid troublesome surprises.
Business Credit vs. Personal Credit
Business credit and personal credit are technically separate systems, but they’re very similar in structure. In both, creditors are responsible for issuing accounts and reporting account holder activities to their respective credit bureaus.
In addition, both personal and commercial credit bureaus compile the data they receive into credit reports, which future creditors can reference to determine whether their applicants are safe lending prospects.
All that said, there are significant differences between business and personal credit, starting with the credit bureaus involved. Experian and Equifax are dominant in both arenas, but TransUnion is personal-only and Dun & Bradstreet (D&B) is business-only.
Personal credit bureaus are also strictly responsible for creating credit reports and leave the design of credit scores to companies like FICO and VantageScore. However, each business credit bureau publishes its own business credit scores.
That has led to notable differences between the nature and number of credit scores in each system. There are many more business credit scores in use than personal ones, and they often differ from each other in more significant ways.
For example, FICO scores are by far the most popular among consumer lenders. And for the most part, they all use similar scoring factors, like payment history, outstanding account balances, and credit mix.
Meanwhile, the PAYDEX and Business Failure Score, two popular business credit scores, don’t even use the same scale. PAYDEX ranges from 1 to 100, while the Failure Score is between 1,001 and 1,875.
How Business Credit Affects Personal Credit
Business and personal credit affect each other in different ways, and only in certain circ*mstances. While personal credit usually has an indirect influence on business credit, business activities are more likely to affect your personal score directly.
In fact, it’s very possible for your business activities to appear in your personal credit report, resulting in an increase or decrease in your personal credit score.
For example, you usually have to apply for your first few commercial tradelines with your personal score since brand-new business owners don’t have business credit.
In that situation, your personal credit history limits the commercial credit accounts you can qualify for, indirectly affecting your business score. However, you’ll also add a hard inquiry to your personal credit report, directly affecting your personal score.
That’s probably the most common interaction between the two types of credit, but certain business creditors will also report your company’s negative account activity to a consumer credit bureau.
Negative activity refers to actions that creditors want to discourage, like making late payments or defaulting on an account. If these show up in your personal credit report, they’ll usually damage your FICO Scores.
Though it’s less common, some business creditors also report positive business credit activities to a personal credit bureau. That includes things like paying on time and keeping low credit utilization ratios, and your personal score may benefit from them.
Types of Business Financing That Can Affect Personal Credit
Generally, there are two types of business financing that typically affect your personal credit. First, there are business credit card accounts from issuers like American Express, Discover, and Capital One.
Every business creditor has its own policy on sharing data with the credit bureaus, and roughly half of the top business credit card issuers report negative business credit card activity to the personal agencies.
Though it’s significantly less common, a couple of them also report positive payment activities as well. As we explore in our article Which Business Credit Cards Do Not Report Personal Credit, here are the most popular credit card issuers’ policies:
| Credit Card Company | Positive Activity Reported to Personal Credit | Negative Activity Reported to Personal Credit |
| American Express | No | Yes |
| Bank of America | No | No |
| Capital One | Yes | Yes |
| Chase | No | Yes |
| Citi | No | No |
| U.S. Bank | No | No |
| Wells Fargo | No | No |
| Discover | Yes | Yes |
In addition to business credit cards, personally guaranteed business accounts of all types will commonly affect your personal credit.
A personal guarantee is an agreement that allows business creditors to recoup their losses by pursuing your personal assets. Business owners often sign them when they lack business credit, as it can help you qualify for accounts.
However, it significantly increases the risk to your personal credit. If you default on your business account and the credit card issuer has to pursue you personally, it will definitely appear on your personal credit report and hurt your score.
Tips for Separating Your Business Credit and Personal Credit
It may not be impossible to eliminate the possibility of your business credit affecting your personal credit, but you can significantly reduce your risks by separating the two as much as possible.
For example, as we explore in our article, How To Build Business Credit Without Using Personal Credit, here are some of the best steps to take:
- Establish a separate business entity: Structure your company as something legally distinct from yourself, like a corporation or an LLC. These offer limited liability protection, but sole proprietorships and partnerships do not.
- Create a distinct business presence: You can further establish your business as a separate entity by giving it a separate business bank account, phone number, and mailing address.
- Request a free EIN from the IRS: An Employer Identification Number (EIN) is a tax ID for your business, like the commercial equivalent of a Social Security Number (SSN). You’ll need one from the Internal Revenue Service (IRS) to apply for business credit in your company’s name.
As you establish your company, try to avoid mixing your personal and business activities whenever you can. It’ll minimize the chances of your business credit affecting your personal credit.
Build Business Credit
Building business credit is a lot like building personal credit. It generally involves opening a diverse mix of credit accounts and using them responsibly to establish a long and positive track record.
Though you should ideally have fully established your business as a separate entity before you get too deep into the business credit-building process, all you really need is an EIN to get started.
As we discuss in our article How to Build Business Credit with Bad Personal Credit, it’s best to target vendor tradelines first. Those are trade credit arrangements that grant you extended repayment terms with specific vendors.
For example, that would include net 30 accounts, which offer you a month of interest-free financing. These types of accounts are of limited benefit to your cash flow, but they're relatively easy to secure when you lack business credit.
Once you’ve opened a few of these accounts in your company’s name, use them to establish a positive business credit history. That’ll help you qualify for the more beneficial and challenging accounts, like the best credit cards.
Alternatively, you can build business credit without taking on business debt by signing up for eCredable Business Lift. For $19.95 per month, we report your existing business expenses to the business credit bureaus and transform them into vendor tradelines!
In addition to your ongoing payments, that includes up to 24 months of payment history! As we explore in our piece on How to Build Business Credit in 30 Days, that makes eCredable one of the only ways to rapidly boost your business credit score.
Sign up today and take the shortcut to better business credit!
Best Business Credit Cards That Don’t Impact Personal Credit To Consider
Vendor tradelines are excellent tools for building business credit, but business credit cards are often better. Not only can you use them at more than one vendor, but they’re also more effective at building business credit due to their status as financial tradelines.
To receive their benefits without risking your personal credit, you should target accounts that don’t report positive or negative business activities to the personal credit bureaus.
While most business card issuers report at least one or the other, there are a handful of major credit card issuers that don’t. As we discuss in our piece Do Business Credit Cards Affect Personal Credit, that includes:
- Citi
- Bank of America
- U.S. Bank
- Wells Fargo
Whichever accounts you use to build your business credit, check your business and personal credit reports regularly to ensure things are going smoothly.
You can get your personal reports for free directly from the consumer credit bureaus and buy cheap copies of your business credit report from BusinessCreditReports.com.
FAQs
Can My LLC Affect My Personal Credit?
As long as you make your debt payments on time, your LLC typically won’t affect your personal credit score. However, some business credit card issuers may report its negative activities to the personal credit bureaus, such as American Express.
Similarly, defaulting on a business credit account after signing a personal guarantee will also affect your personal credit. The issuers are fully entitled to collect your business’s debts from you and will often report you to the personal credit bureaus in the process.
Do Business Loans Go Against My Personal Credit?
Business loans usually don’t appear on your personal credit report unless you default on your account after signing a personal guarantee. In that case, the issuer will report your late payment activities and default account status to the personal credit bureaus.
Do Business Loans Look at Personal Credit?
Every business lender has its own policy on whether or not it checks your personal credit when you apply for a small business loan. Some will require that you submit to a hard inquiry and some will not.
To minimize the chances of a business loan provider looking at your personal credit, establish your business as a separate entity, build up its business credit, and apply for your business loans with its EIN.
