“John, I run a small carpentry business with 19 employees. I use several lines of credit to fund operations and, from time to time, to meet payroll.
The last few years have been rough on my company and me and I defaulted on one of my company credit cards.
Fast forward to today. I recently applied for a mortgage refinance and that card is on my credit reports, lowering my credit scores.
Is that legal? It’s a business card.”
What happened to this reader is not at all uncommon. This is where your business credit and personal credit bleed into each other’s backyards with serious repercussions.
So, how can that happen?
When many small business owners/operators apply for business credit they are asked to sign a credit application.
This is really no different than you applying for a personal credit account, like a credit card.
However, in the business credit application there could be language obligating the business owner to be liable for the debt, personally.
The language that obligates the small business owner personally is called a “PG.”
The PG is a “Personal Guarantee” and it means that if the loan goes into default the creditor can attempt to collect the unpaid debt from the business owner.
By personally guaranteeing the debt the business owner allows the creditor to report the activity of the small business account to his or her personal credit reports.
And, because credit scoring systems can’t tell the difference between personal and business accounts, the activity of the account is considered by credit scoring systems like any other account.
That means if you default on a personally guaranteed small business account it can lower your credit score just like if you defaulted on your auto loan.
This cuts both ways, mind you. When the small business owner signed the personal guarantee, he or she gave the lender permission to pull his or her personal credit reports.
Because you’ve agreed to guarantee to debt, the lender wants to know how you manage your other personal accounts. If you’ve got good personal credit it’s easier to get approved for business credit.
It’s not typical for a small business lender to report business credit to the personal credit bureaus while it’s being paid on time, although there are exceptions.
Most of the time in order for your business accounts to appear on your personal credit reports they have to be in default.
I personally have three small business accounts and none of them are on any of my personal credit reports.
It This Legal?
Next is the question of legality. Is it legal for a small business lender to report a business credit account on a personal credit report?
Remember, even though the credit card or loan is written in the name of the business, it’s still guaranteed by an individual person.
So yes, it’s absolutely legal for a business lender to report to a personal credit report.
If you’ve got small business credit cards or loans there’s an easy way to tell if they’re being reported to your personal credit reports.
All you have to do is check them, which you can do for free once every 12 months at www.annualcreditreport.com.
The CARD Act Does Not Apply
Some people use small business credit card accounts as a way to keep their personal debt off their personal credit reports.
It’s not that hard to get a small business credit card, as long as you’ve got good personal credit for the “PG.”
They’ll use the small business card as their personal credit card instead of for business operations, which have the effect of preventing credit card debt from appearing on their personal credit reports.
If you’re considering a small business credit card you need to be aware that the consumer protections conferred by the 2009 CARD Act do not apply to them.
Retroactive rate increases, short grace periods, over limit fees…these things are restricted by the CARD Act for consumer credit cards but not for small business credit cards.
John Ulzheimer is the Credit Expert at CreditSesame.com, and a credit blogger at SmartCredit.com, Mint.com, and the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. You can follow John on Twitter here.