Business Credit Card Application

Thursday, June 7, 2012 at 4:20pm by Site Administrator

How Your Personal Credit History Can Affect Your Application

New business has always faced a catch-22 of sorts regarding credit. Generally speaking, they need more and have access to less. Whether it is a bank loan or business credit card, lenders want access to the same information used in processing personal credit applications. Namely, they want a history of debts and payments that can be used to establish their risk. They use this information to decide on whether to fill the application and at what terms.

Lender Assurance

The problem with establishing credit for a new business is a lack of history. Lenders have no basis for establishing risk, and any applications will be in vain until they have this basis. Of course, lenders are always looking for trustworthy borrowers because this is how they make money. Hence, they will want to pull your personal credit history after finding insufficient history on the business.

It is common wisdom that small business owners are best served by keeping personal and business finance separate. This protects the owner(s) from damage to their personal credit should the business experience problems, and it protects the business in the same way. Any new business is best off following this wisdom by taking the known steps to establishing a positive credit history. Unfortunately, capital is usually a requirement for starting a new business. Without access to a cosigner or some form of collateral, such as a home, business inventory or several vehicles, allowing the lender to peruse the personal credit history is generally the only option.

FTC Ruling on Consumer Reports Used for Commercial Credit

The Federal Trade Commission has ruled that lenders must obtain your written permission before accessing personal credit reports related to a business credit application. This is good news because it gives owners the opportunity to weigh their options. In addition, the owner will have time to pull their own report and ensure there are no errors.

Another benefit of the FTC ruling is that the creditor must provide justification for denial of credit. In any adverse ruling, they must send you a letter telling the source of the credit report and the basis for denial. This information can inform future attempts at applying for business credit.

Assessing the Personal Credit Report

There are several items on the personal credit report that can affect your business credit application. These are the same items a lender will look at when considering an application for personal credit, and they include:

  • Length of History: Credit repair professionals routinely caution people to avoid closing old accounts. Credit reports only show the last seven years of activity, and a lack of history can be just as bad as a poor history of debt management.
  • Bill Payment: All lenders, several large corporations, and many other service providers routinely report bill payment activity to a credit bureau. Incurring these bills and paying them on time every month shows the lender that you have both income and responsibility.
  • Debt-to-Credit Ratio: The old FICO scores placed little emphasis on this facet of personal credit, but newer methods of score calculation have elevated its prominence. Generally, having more credit and less debt is better. However, this depends partly on the types of credit and debt. The most reputable forms of debt, such as a home mortgage and auto loan, are viewed positively. Payday loans and even personal loans from a bank will count more against the ratio.

Commercial lenders will consider all this information, and anything else on the credit report, to make a decision. Then they will turn to the credit score to make a decision on terms, such as the credit limit, interest rate and penalties. Some lenders will be upfront about the particular type of credit score they use, but the best idea is to prepare for review of the report as though there were no score.

Dangers of Attaching Personal Credit History to Business Credit

It is not always possible to start a new business without applying for credit with your personal credit history. This puts the business and personal finances in danger and should be rectified as soon as possible. A great first step is to build a business credit history by opening a business credit account without your personal information. Once this first step is accomplished, you can reduce liability by closing accounts that relied on your credit history.

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