The Difference Between Personal Credit and Business Credit

By Allan Halcrow Grace | American Express^® Freelance Contributor
6 Min Read | June 30, 2021

Summary

Does personal credit affect business credit?

Does business credit affect personal credit? That depends. While these two are separate, there are situations where your personal credit can impact your business credit. In most cases, this is because your personal credit will often impact your ability to obtain business credit products. This means that if you have a low personal credit score to begin with, you may have a hard time getting approved for a business card.

What about the other way around? Does your business credit ever impact your personal credit? Again, that depends. While the two are separate, in some cases it can. If you signed a personal guarantee when obtaining a business card, for instance, then you could be held responsible for making payments. If you don’t, then your personal credit score could be impacted.

In short, it all depends on your situation.

Business Credit vs. Personal Credit: What’s the Difference?

Both business credit and personal credit rely on historical financial data to indicate a business or individual’s creditworthiness, or how reliably they have managed debt like loans or credit cards. And for businesses and individuals alike, good credit can make it easier to obtain more favorable interest rates, credit limits, and loan terms.

Still, business credit and personal credit are quite different. Here’s how:

• Social Security Number vs. EIN: Personal credit profiles are linked to an individual’s Social Security number. Business credit profiles are linked to employer identification numbers, or EINs, issued by the IRS. It’s important to note that businesses registered as sole proprietorships do not need an EIN for taxes but can still obtain an EIN to establish business credit.
• What Affects Personal vs. Business Credit: Personal credit reports and scores are generally shaped by payment habits, credit card usage, loan usage, and other types of credit. Business credit history factors in the same type of financial information, but might also include vendor credit history, historical data like public record information, business size, and payment performance in the context of the business’s industry.
• How Credit is Reported: Personal credit is reported by the three leading credit reporting agencies: Equifax, Experian, and TransUnion. For businesses, Equifax and Experian both offer business credit reporting services, compiling data from outside sources to assess a business’s credit history. Business credit can also be reported by specific credit reporting services that only deal with businesses, such as Dun & Bradstreet (D&B). To report business credit with D&B, businesses must register to obtain a free nine-digit D&B DUNS number.
• How Credit Scores are Reported: Personal credit scores are determined by FICO or VantageScore and range between 300 and 850 – the higher the number the more creditworthy the individual. Business credit scores are expressed differently and vary based on the credit reporting organization and index used. Equifax, Experian, and D&B all produce business credit scores in addition to credit reports, and usually range between 0 and 100. Meanwhile, the FICO Small Business Scoring Service (SBSS) specifically assesses small business credit and ranges from 0 to 300. Again, the higher the number, the more creditworthy the business.

How to Establish Business Credit

While there’s no law requiring businesses to establish business credit, there are practical reasons to do so. For example, a good business credit history can make it easier to obtain financing for major purchases like new equipment or real estate, with better interest rates and terms – all without needing a large stockpile of cash. Good business credit is also likely to make the business more attractive for potential business partners or business insurance providers.

To establish and build business credit, consider these tips:

• Get an EIN. Even if you’re a sole proprietor and do not need an EIN to operate your business, it’s a good idea to obtain one. An EIN is necessary to establish a business credit profile, to help keep personal and business credit separate, and to open a business bank account.
• Ensure Lenders Report Your Payment History. If your account information isn’t being reported to at least one of the four main business credit reporting agencies, your efforts to make on-time payments might go unnoticed. Be sure lenders, creditors, and even suppliers report to credit bureaus if possible.
• Establish credit accounts with suppliers. Even if you can pay cash, establishing credit accounts with vendors can help you build business credit – if the vendors report payments to business credit reporting agencies.
• Open a business credit card. Using a business credit card is a tried-and-true way to establish and build business credit, as long as it’s used responsibly. If you’re unable to qualify for a business credit card, consider opening a secured business credit card instead of relying on a personal credit card. With secured credit cards, account owners deposit funds into the account as a guarantee that any charges made will be covered.
• Obtain a small loan. Most businesses will need a loan from time to time. Not only are they a useful means of financing, but responsible repayments can be another effective way to build business credit.
• Be responsible with credit. Always paying on time indicates that you are responsible with credit and can effectively manage debt. A history of late payments can hurt a business’s credit rating, which can in turn negatively affect its ability to obtain financing or do business with suppliers.

It’s a Good Idea to Keep Business and Personal Credit Separate

Why Keep Business and Personal Credit Separate?

When it comes to business credit vs personal credit: which one’s best for your business? In most cases, it’s best to keep personal credit and business credit separate as much as possible.

Why does it matter? For one thing, keeping them separate makes it easy to track expenses and manage employee purchases. But there’s another reason you’ll want to keep these two separate. Using business credit for business purchases gives you the chance to improve your business credit score which can help you to get credit more easily in the future should you end up needing it. Separating business from personal may also offer some protections from a legal standpoint as well.

Keeping business and personal credit separate can help business owners:

• Protect personal assets. In the case of an LLC, maintaining separate business and personal expenses is important. Mixing personal and business together can erode away at some of the protections that are in place. This means if your business is ever sued, personal assets could be at risk.
• Build credit. Keeping your business credit separate from your personal credit gives you the chance to build your business credit score up. This could improve your chances of securing financing down the road; something that’s especially important if you end up needing to take out a bigger loan later on.
• Make expense management easier. Finally, keeping business and personal expenses separate makes expense management much easier as well. You’ll be able to see at a glance what’s happening with your business, and it will make covering expenses easier as well. Having kept everything separate will save you from a world of hassle when tax time rolls around as well.