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A credit card is a credit card, right? Not exactly, at least not when it comes to business and consumer credit cards. Though they generally work in the same way, providing credit limits with scheduled repayments, variable interest rates, and even rewards and bonuses, some characteristics make each card type unique. The difference between business and personal credit cards is extremely important.
We’re going to cover seven differences between business and consumer credit cards. The information will help provide you with direction in deciding when it’s time to get a business credit card.
7 Differences Between Business and Personal Credit Cards
1. Application and Ownership
Business credit cards: It’s possible to apply for a credit card in which the business will be the cardholder. That will only happen if the business already has an established credit history and cash flow that the card issuer can rely on. Even so, some card issuers will base approval and ownership on both the business and its owner(s). As such, personal income and individual credit reports will be required of all owners of the business.
In the case of upstart businesses, it is usually possible to apply for a business credit card personally but have it issued with the name of the business on the card rather than the applicant’s name. In that way, the card will appear as a business credit card even though the business is not the cardholder.
Personal credit cards: When you apply for a personal credit card, both the approval and credit limit will be based on your income and your credit score. Once the card is issued, it will be owned by you as the credit card holder.
2. Credit Reporting
Business credit cards: Credit history and performance on these cards will be reported to more diverse credit repositories than personal credit cards. For example, the results may appear on business credit reports from the three major credit bureaus, Experian, Equifax, and Transunion. But they may also be reported to business-specific credit agencies, like Dun & Bradstreet.
The advantage of credit history being reported to business-specific credit agencies is that it allows the business to develop a credit rating apart from the owner or owners of the business. Eventually, that credit rating may enable the business to apply for credit elsewhere solely in the name of the business itself.
Personal credit cards: Credit history and performance on these cards will be reported to the three major credit bureaus.
3. Credit Limits
Business credit cards: Since credit limits on business cards are largely based on business revenue, in addition to personal financial resources, they can be substantially higher than for personal cards. A business card may also be subject to more frequent reviews, so the issuer can more carefully evaluate business cash flow. As that cash flow increases, the credit limit will also increase.
Personal credit cards: Credit limits are determined entirely by income and credit score. The issuer may increase the credit limit only when a personal credit score shows significant improvement and/or he or she experiences a measurable rise in income.
Business credit cards: Rewards on these cards often center on business-related expenses, though many business credit cards do focus on enhanced travel rewards. An example is the Ink Business Preferred® Credit Card.
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That doesn’t mean rewards are limited strictly to business expenses, but only that the highest reward levels are paid for such expenses. You can generally earn rewards for personal expenses purchased with business credit cards.
Personal credit cards: Rewards on these cards center on personal expenses like grocery store purchases, restaurants, gas stations, and drugstores. Rewards typically land between 1% and 2% of the overall cost of the transaction and like business credit cards, some of the best rewards rates are when you book travel using the issuer's travel platform.
5. Additional Cards on the Same Account
Business credit cards: These cards commonly permit the issuance of employee cards at no additional cost to the cardholder. Purchases made by employees using the cards can accumulate rewards for the cardholder, and even allow the cardholder to set spending limits on each employee’s card.
Personal credit cards: Many, but not all, personal credit cards permit cardholders to add authorized users to the account. These are normally limited to family members whose purchases can accumulate rewards for the cardholder.
6. Consumer Protection
Business credit cards: These cards are generally not covered by government-issued personal protection on credit cards, such as the CARD Act of 2009 and subsequent amendments.
Personal credit cards: These are fully covered by the CARD Act of 2009. The Act includes protections like no interest on paid-off balances from previous periods, limitations on interest-rate increases, limits on fees, a requirement consumers have a minimum of 21 days to pay, and other protections.
7. End-of-Year Reporting
Business credit cards: It’s common for business credit card issuers to provide highly detailed year-end summaries. These summaries will not only break down general expense categories but also specific business expenses. They offer an excellent opportunity to summarize business activity on the credit card without the need for a detailed analysis by either the cardholder or the cardholder’s accountant. It’s a big advantage when it comes time for income tax preparation for the business.
Personal credit cards: Some consumer credit cards provide year-end summaries detailing spending categories purchased with the card. For example, a summary may break out costs incurred during the year for travel, restaurants, auto expenses, entertainment, and other personal expenses.
Frequently Asked Questions (FAQ)
What is the difference between personal credit and business credit?
Personal credit focuses entirely on debts and credit lines held by the consumer personally. That will include all mortgages, auto loans, student loans, personal loans, credit cards, and other types of debt. Performance on these obligations will be reported to the major credit bureaus, resulting in a credit score.
Business credit relates to similar debt types except that they are legally held in the name of a business. The business is the cardholder and is fully responsible for the management and repayment of the obligations. Unless the business owner is co-obligated on a business debt, the payment performance on the loan or credit line will be reported on a business credit report in the name of the business only.
Can business credit cards be used for personal use?
Generally speaking, yes. Most business credit cards don’t make a distinction for personal expenses, and can even accumulate rewards on those activities.
However, using a business credit card for personal use defeats the purpose of having the card in the first place.
One of the major reasons for a business credit card is to make year-end reporting of business expenses on the card easy to summarize and transfer to financial statements and income tax returns. But if you combine personal expenses on your business credit card, you’ll need to do a year-end analysis to separate business from personal expenses.
You should also be aware that, buried somewhere in the fine print, the card issuer may reserve the right to close out a business credit card if it’s clear it is being used primarily for personal reasons. It may either convert the business card to a personal card or close out the account entirely.
Can I use a regular credit card for my business?
You can, but there are plenty of complications. First, you’ll need to separate business and personal expenses at the end of each year. Second, interest expense on a business credit card is tax-deductible; interest paid on a personal card is not.
Third, using a personal credit card for your business eliminates the possibility of using the card to build your business brand. Finally, there may be legal ramifications. If your business is incorporated and you use your card for purchases, you will be liable for payment, even though charges were made for your business.
Bottom Line: When is it Time to Get a Business Credit Card?
While it is common for new business owners to use personal credit cards while their businesses are in the liftoff phase, you’ll eventually want to make the switch over to one or more business credit cards.
There are many advantages to this arrangement:
- A business credit card makes the preparation of financial statements and income tax returns easier because no detailed analysis is required to separate personal expenses.
- Business credit cards can enable you to build your business brand, similar to having a website and business cards.
- They can be an essential part of building a business credit rating that will enable you to apply for future credit in the name of your business alone.
- Interest paid on a credit card held in the name of your business is generally tax-deductible.
- Business credit cards often come with higher credit limits than personal credit cards.
- Business credit cards pay more generous rewards on business-specific expenses and big business credit card bonuses.
In a perfect world, it would make sense to obtain a business credit card as soon as you launch your business. But failing that, you may decide it’s time to get a business credit card once your business reaches a certain cash flow level, and you are more certain of the direction the business will take.