The theory of owning a small business used to be that you need to keep your business and personal finances separate. This helps keep accounting accurate and allows the business itself to build its own credit history. With the recently enacted CARD act legislation, the benefits of business credit cards remain but with a few strong caveats.
Why the Changes?
The CARD Act was devised to offer more consumer protection for credit card holders. Because card companies began inflating interest rates, lowering grace periods, and essentially charging any amount of fee to turn a profit after record defaults, consumers had little protection and faced mounting debt daily. But the CARD Act only covers personal credit cards as business cards are excluded from the new protection regulations.
While technically the business credit card is for business, the responsibility for payment and card management still falls to the owner. After all the changes that have been made, it stands to reason that a personal credit card might now make more sense for certain individuals. If you are using a card to fund your business and cant afford to pay off the balance in full each month, you may need the protection of the CARD Act to keep interest rates from increasing, adding more debt to your balance. Under the new rules, you can not be assessed a penalty until you are 60 days past due.
Major credit card companies do not have to follow the same guidelines concerning business cards. While it is true that a personal card presently offers more protection, business cards can still be beneficial to a business. If you have several employees with access to a company card, you can set individual spending limits to curtail unnecessary or unauthorized spending. As mentioned, separating business from personal is much easier because you can use credit card statements to easily track your business spending which is necessary for accurate accounting and better tax preparation. Another incentive of having a business card is that typically you can be extended a larger line of credit than you can with a personal card. This gives the business more to work with, especially during the start up phase or a period of growth.
So what should you do? It comes down to your own personal financial situation. If the business is turning a profit and paying off balances in full each month is not a problem, a business card may be the better option. You can benefit from the perks of business cards that personal cards dont offer. If you are new in business and know it will be hard to guarantee total balance payments each month, you might consider sticking with a personal card until you get the business off the ground and stable.
Regardless of the type of card you choose, you should always make credit management a top priority. The protection and perks of each type of card mean nothing if you do not use your credit responsibly. Defaulting on payments, maxing out lines of credit, or spending over your limits are all negative reporting factors that will crumble the credit foundation of not only the business but also of the business owner. Poor credit scores or payment histories will limit what you can do financially. As with personal finances, a business owner must buy what they can afford to pay back and keep credit spending to a minimum.
Research the variety of card offers for both business and personal use before making a decision as to which card has the most advantages for you now. Focus on building a solid credit history from the start and you will reduce your risk of falling into the credit card debt trap, harming your business and personal credit history.