Business credit cards are a little tricky to understand. Many consumers obtain one and mistakenly assume that by using it, they are building a credit history for their business. It’s not that simple. Here are a few things I found out during my quest for business credit.
Pretty Much Anyone Can Apply For A Business Card
Even if the business credit card application asks for a Federal Employer I.D. number (FEIN) it may not be required. The applicant’s social security number usually will suffice. The application may ask questions about the type or category of business, but approval isn’t based on the answer. Credit card account approval is always based on personal credit standing.
Business Card Accounts Are Often Based on Personal Credit Standing
If an applicant doesn’t already have a business credit file established, the credit card account will be attached to the applicant’s personal credit, even if the applicant uses an FEIN on the application. The FEIN is associated with the individual’s social security number, which cannot be concealed.
Business Accounts In Good Standing May Not Show Up On The Personal Credit File
Even though the issuer relied on the applicant’s personal credit history for account approval, the business credit card may not show up on the applicant’s credit history. In that case, the applicant’s credit score will not benefit from the available credit or from positive payment behavior.
The Applicant Is Personally Liable In Case Of Default
If a business account goes into default, it is reported to the credit bureaus. American Express, for example, reports closed derogatory accounts (120 days delinquent on charges other than annual or membership fees).
Business Credit Cards May Not Even Be Reported To Business Credit Reporting Agencies
Solopreneurs, freelancers and many other small business people are surprised to find out that opening a business credit card account does not necessarily result in the creation (and building) of a business credit file.
Some business credit cards, like the American Express Costco card, do report positive and negative payment behavior to the Small Business Financial Exchange, which in turn reports to agencies like Experian, Equifax or Dun & Bradstreet. Whether and what to report are decisions made by each creditor.
The business credit bureaus do not, as a matter of course, open a business credit file even when the payment behavior is reported. Experian requires minimum information to generate a business credit score (at least one tradeline and/or one demographic element).
My personal experience shows that having one or more business credit cards is not enough to generate a business credit file or score. If a company already has an established credit file, then responsible use of the business card may boost the business’s score.
To establish a file, Experian recommends four steps:
- Obtain an FEIN
- Open bank accounts in the business name
- Obtain a listed business telephone number
Notably absent from the list is “obtain a business credit card.”