If you own your own business, it’s only a matter of time before you’ll need a credit card to charge expenses. But should you get a Business card instead of using a Personal one? The basic function of the cards work the same – you’ll have a credit line, interest rate, and earn certain perks based on the card you choose. However, there a few differences to take into consideration before sending in that credit app.
- The perks. Business credit cards are going to have rewards geared towards businesses vs. personal. To get the most Cash Back or Reward points, you’ll most likely have to spend money in categories that businesses usually spend on—office supplies, computer hardware and software, phone services, etc. You’ll find that Personal credit cards often have rewards for dollars spent on restaurants, grocery shopping, travel, gas etc. So, if you plan to spend a lot of money at Staples, a Business card would make more sense.
- Consumer protections. Did you know that Business credit cards aren’t monitored like Personal credit cards are? The Credit Card Act of 2009 usually doesn’t apply to your business through a business credit card. Basically, your business credit card’s APR could be subject to change without you knowing it or your late fees could be much higher than a personal card should you pay late. It’s something to consider if you don’t plan on paying your balance in full each month. In many cases, most credit card companies do extend the same consumer protection laws to Business credit cards as a courtesy but make sure you read the cardholder agreement.
- Card limits. If you choose to apply for a Business credit card, you’ll most likely find that your credit limit is higher than if you had applied for a Personal card. The main reasoning is because businesses make and spend more money than the average consumer. When making your choice, make sure you consider the card limit you might need vs. the actual balance you might carry. The credit bureau will take into consideration your credit card utilization. The goal is to utilize until 30% of your available credit. So, if you know you would be close to hitting a Personal card limit of $15,000, and you can switch to a Business card with a $50,000 limit, it would favor your credit to move to a business card.
- Personal credit. Obviously, if you use a Personal credit card, it will reflect onto your credit report, BUT using a Business credit card can also affect your personal credit too. In many cases, you are personally liable for your business’ debts. If your business can’t make the payments, you’ll still need to make them. Many credit card companies will look at your business credit as well as your personal credit before issuing a card to make sure that you show good standing in paying your debts. If you are considering applying for a business loan in the future, they will look at your business credit history and building a solid business credit history via a credit card is a step in the right direction.
- Paying off balances. With a Personal credit card, the issuer is legally required to apply the payment to the amount with the highest interest rate if you have different interest rates on the same account. So if you have a $500 charge balance with 15% interest and a balance transfer with 3% interest and a $1,000 balance, your future payments will be applied to the $500 balance with 15% interest until it’s paid off. However, with a Business credit card, the issuer can choose to pay down the balance with the lowest amount of interest first – resulting in you paying more interest over the span of the card balance.
- Separating your expenses. Having a Business credit card can make it very simple to keep your business and personal expenses separate. This makes record-keeping a lot easier come tax time. With separate cards, you can easily see your overhead and itemize as many deductions as possible. Many credit card companies who offer Business cards allow you to export your monthly or year-end statements, which you can send to your tax preparer when it’s time to do your annual return.
If you are not sure which type of card is right for you, here is a summary to help you choose:
Business credit card benefits for:
- An entrepreneur who wants to establish business credit for his or her business.
- A company with major business expenses that align with most business credit card reward categories.
- Someone looking for a higher credit limit for his or her business.
Personal credit card benefits for:
- A sole proprietor with minimal overhead costs.
- Someone whose spending doesn’t align with business credit card spending categories.
- Someone who doesn’t anticipate applying for a small business loan anytime soon and isn’t interested in building business credit.
At Litchfield Bancorp, we take your business seriously and personally no matter the size. If you need help with any of the Perks we offer to our account holders or need a business loan, give us a call or stop by any of our locations. We are happy to help!
Torrington Branch Manager, Assistant Vice President
NMLS MLO ID: 880889