Running a business will undoubtedly impact your personal finances, but here’s how you can keep your credit safe.
The benefits of good credit go beyond being able to easily borrow money. Your credit can impact your ability to rent a home, open new utility accounts, and, in most states, poor credit can lead to higher auto and homeowners insurance rates.
As a result, building and maintaining good credit can help you save money even if you don’t plan on taking out another loan. And if you do want to borrow money, having good credit can be important to securing the most favorable rates and terms.
But small business owners sometimes intermingle their personal and business finances, which could hurt your personal credit. Here are four ways to make sure that doesn’t happen.
1. Continue paying your bills on time
Your payment history is one of the most important credit-scoring factors in determining your personal credit scores. On-time payments can help your credit, while a payment that’s 30 or more days late can hurt it.
Keep track of all your credit cards and loans—personal and business—and try to always make at least the minimum payment on time.
If it looks like you might not be able to afford a payment, call the creditor immediately and ask about your options. Some lenders might offer a short grace period. Or, if your trouble is due to extenuating circumstances (such as a medical emergency), you may qualify for a hardship plan that lowers your payments.
Credit scores aside, paying your bills on time can also help you avoid late-payment fees and other penalties (such as penalty interest rates on credit cards).
2. Know which business credit cards report to your consumer credit reports
Keeping your personal and business accounts separate can be helpful from an accounting perspective, even if you haven’t created a limited liability company or corporation. One way to do this is to open a business credit card and only use it for business expenses.
Many card issuers offer business credit cards, and their rewards often better align with business expenses than personal cards. Additionally, you may be able to order free employee cards that are connected to the main account.
Some credit card issuers don’t report business credit card accounts to the consumer credit bureaus. In other words, they won’t impact your personal credit history or scores. But generally, even if the card is opened in the business’s name, you’ll need to sign a personal guarantee—a promise to personally repay the debt if the business can’t.
As a result, if you fall behind on the card payments, the card issuer may report the delinquency to the consumer credit bureaus, which could hurt your personal credit. If your account is sent to collections, that may also appear on your personal credit reports.
3. Keep your utilization rate down
Besides your payment history, your utilization rate is one of the most important credit-scoring factors. This is the percentage of available credit you’re using on your credit cards. For example, if you have two credit cards with $5,000 credit limits each (so, $10,000 total), and your current combined balance is $2,500, your utilization rate is 25 percent.
The balance that gets reported to the credit bureaus is often the balance at the end of your statement period. As a result, you could have a higher utilization rate even if you pay off your credit cards each month.
But a lower utilization rate is best for your credit scores.
This can be especially important for business owners to remember as small businesses often have lots of expenses. If you’re using business credit cards that report to the consumer credit bureaus or you’re using a personal card for business expenses, you could have a high utilization rate that’s hurting your credit scores.
A simple trick is to pay down your card’s balance before the end of your statement period. If you do, a lower balance gets reported to the bureaus.
4. Build your business’s credit
One of the best ways to protect your personal credit is to build your business’s credit. If your business takes out loans, credit cards, or has a terms agreement with suppliers, those accounts could be reported to business credit bureaus.
As your business uses the accounts and pays its bills, it can build a business credit history that’s separate from your personal credit. There are also business credit scores, which creditors and suppliers can use to evaluate your business’s application for a loan or terms agreement.
These accounts won’t impact your personal credit if they’re only reported to the business credit bureaus. However, as with business credit cards, falling behind on an account could hurt your personal credit if you signed a personal guarantee.
While entrepreneurship can be a pathway to personal wealth, mixing your business and personal finances could be a step in the wrong direction. As you build your business, take time to understand what impacts your personal credit and look for ways to finance the growth that won’t hurt your credit.