Whether you’re an entrepreneur with a laundry list of business expenses or a freelancer interested in winning rewards points, business credit cards may be an excellent solution. With that being said, business and personal credit cards are quite different in a number of ways. In order to make the right choice, you’ll need to do some due diligence.
Remember: business and consumer credit cards are used for drastically different purposes. As a result, they often have wildly different terms and conditions, which can be confusing to new entrepreneurs and curious consumers alike. Here are four ways that they differ from each other:
1. Business credit cards do not provide consumer protections
Unlike consumer credit cards, which are covered under the CARD Act of 2009, business credit cards are not subject to many of the same restrictions. Depending on the business card, banks have a lot of leeway to alter contracts as they see fit, slapping on extra charges, higher interest rates, and shortening grace periods below the standard 45-day notice given to consumer cardholders.
This glaring loophole stems from the perception that business owners are more likely (and able) to manage their finances than regular consumers. As a result, business cardholders are left largely at the mercy of banks: a 2013 survey of small business credit cards by Wallethub found that of 10 major banks, only Bank of America extended all of the CARD Act’s protections to its business cards, with Capital One coming in at a close second.
So be sure to carefully read business card agreements. Take your time reviewing the credit card that best suits your business and circumstances.
2. Business credit cards tend to have a higher credit limit
Given that entrepreneurs often use business cards as a source of funding for their fledgling business, it’s no surprise that such cards tend to have higher credit limits than consumer cards. In fact, business cards can have credit limits anywhere from $25,000 to $150,000, though limits vary depending on the card (and cardholder credit).
Conversely, credit limits on consumer business cards are much lower, though consumer limits are also tied to the cardholder’s credit score. People with high credit scores (801 or higher) have access to an average credit limit of $9,606, while those with low credit scores (561-580) only had access to an average limit of $1,496.
3. Business cards will (usually) only affect business credit
Because business credit cards have different provisions and higher limits than consumer cards, they also tend to affect a different type of credit.
Businesses are set up as individual entities that are separate from their proprietors, so they will have different checking accounts, legal statuses, and of course, credit scores. As such, business cards generally won’t affect your individual credit, though there are some key exceptions: some business credit cards require cardholders to sign personal guarantees to pay off debt, which can open up personal assets to liability.
It’s true that good personal credit can give an entrepreneur a much-needed boost in business credit (and vice versa). But for the most part, the two are separate. Also, business credit cards won’t raise your personal utilization, which is reassuring since businesses generally require lots of capital, and utilization of credit is a key variable in determining your business (and personal) credit score.
Here’s some more information about how a business card will impact your credit scores.
4. Business credit cards may have a longer application
Because business cards have higher credit limits and offer different rewards than consumer cards, they may require a longer application process.
For example, Bank of America requires potential business cardholders to submit a business tax ID, the incorporation date of a business, legal business name and structure, and gross annual sales and profit.
Choose your card wisely
Ultimately, business cards and consumer cards are very different animals, with different conditions, credit limits, and impacts. As a result, potential cardholders really should take the time to thoroughly study business credit cards.
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