What this article covers
Opher Ganel argues that most small business owners are better off dedicating a personal (consumer) credit card to business spending, because the 2009 Credit CARD Act protects consumer cards but not business cards, and many business cards still hold you personally liable. He walks through five considerations, from tax records to rewards, and includes a dissenting view from a CFP® professional on why a business card can help build business credit and stretch startup cash.
Key Takeaways
You don’t need a business credit card to separate business and personal spending
Most Americans already carry more than one card, so you can pay off an existing personal card and dedicate it to business purchases. You still get a clean statement record of transactions, and rewards work the same way: a 2% card on $5,000 of monthly business spending returns about $100 a month.
Business credit cards lack Credit CARD Act protections and often carry a personal guarantee
The 2009 Credit CARD Act curbed many issuer abuses, but it doesn’t apply to business cards, whose contracts often let issuers change terms at any time, raise rates on existing balances and apply penalty rates without notice. And if the fine print makes you personally liable, late payments can still hurt your personal credit score even if your business is an LLC.
A business card can make sense if its perks outweigh its fees and fine print
Financial advisor Cady North, CFP®, counters that business cards can help build a separate business credit profile and often offer bigger sign-on bonuses, category rebates and longer 0% introductory periods. Opher’s test: check whether you can realistically earn the rewards, whether they exceed any annual fee, and whether you’re personally liable, then pay the balance in full every month.
As a small business owner, you need a credit card. Whether it’s to pay for extra memory in that sleek new smartphone, place orders on Amazon, or just so you don’t have to carry a lot of cash or an unwieldy checkbook to the store when you buy supplies. The question is, should you use a personal credit card or get a business credit card?
Here are five things to remember about using a credit card for your business to help you choose.
1. You Don’t Need a Business Credit Card to Keep Business Spending Separate
Americans usually have more than one card. According to Credit Karma, the average number of cards carried by Americans is between 2 and 3. Credit Karma members have an average of nearly 5. This means you can take an existing card, pay off the balance on it, and start using it for business.
2. Paying With Any Credit Card Simplifies Business Tax Records
First, your card statements give you a record of transactions even if you lose receipts. Second, paying with a card reduces the number of Forms 1099 you need to send out at the end of the year. Say you paid more than $600 to the company that cleans your offices. If you charged it, the card issuer will send them a Form 1099, so you don’t need to.
3. You Can Earn Rewards on Business Spending With a Personal Credit Card
Business expenses are a fact of life. You have to spend money to make money. However, if you use a credit card that offers, say, a 2% reward, and you charge an average of $5000 a month, you’ll get an average of $100 a month back on those deductible expenses. Sweet! This is just as true using a consumer credit card with rewards as a business credit card.
4. Are You Personally Liable for a Business Credit Card? Often, Yes
Setting up your business as an LLC or S-corp protects you from business creditors. This means that if you default on paying the minimum payments to your business card or loan, the creditor should be limited to going after your business assets. This is true unless in the small print they got you to add yourself as personally liable for any balance owed. In that case, being late on payments will still ding your personal credit score.
5. The Credit CARD Act Doesn’t Protect Business Credit Cards
The 2009 Credit Card Accountability Responsibility and Disclosure Act stopped some of the worst abuses heaped by credit card issuers on consumers. However, this doesn’t apply to business credit cards. The small print of such cards’ agreements often hides a bunch of traps for the unwary. Most business credit card contracts allow issuers to do things like:
- Change terms at any time, including raising rates on balances you already owe
- Apply penalty interest rates without notice for any violation
- Apply penalty fees that can be far in excess of the value of your violations
Should You Use a Personal or Business Credit Card for Your Business?
In my opinion, if you’re like most small business owners, it’s best to dedicate a consumer credit card for use in your business. the Credit CARD Act protects such cards, so the small print likely hides far fewer “gotchas.”
However, my opinion is far from universal. Cady North, CFP®, CEO and Financial Advisor at North Financial Advisors, for example, disagrees.
She says:
I have a different take on business credit cards. They’re better than consumer cards for a couple of reasons. First, you can start building a credit profile for your business. Some issuers will issue the card using your business tax ID, and while they may use your personal credit to initially approve you, they don’t report payments, credit line use, etc. on your personal credit report.
Additionally, when starting a business, every dollar counts, and some business card issuers offer better sign-on bonuses and ongoing rebates for commonly purchased business products (e.g., FedEx/Staples, mobile phone bills, computers, etc.). They also typically offer a longer period of introductory 0% interest financing to help get a business through 6-12 months of start-up expenses.
There you have it – as in most things in life, there are pros and cons to each choice you can make. The question is, which option’s pros are most compelling in your specific situation relative to that option’s cons?
3 Questions to Ask Before You Sign Up for a Business Credit Card
1. Are the requirements to cash in on those special offers ones you can easily meet (and are they worth it)?
2. Are there annual fees, and if so, do the benefits of the specific card outweigh that cost?
3. Does the small print hold you personally liable for charges on the card?
If you still decide to go this route, choose the best business credit card you can qualify for (NerdWallet offers a useful list), read the fine print carefully, and set up a system to pay off the card in full each month, even if you have to cover it from another source such as putting money into your business account from your personal checking.
Frequently Asked Questions
Can I use a personal credit card for business expenses?
Yes. The article suggests paying off an existing personal card and dedicating it to business spending, which still keeps business transactions separate and gives you statements as a record. Opher Ganel considers this the better choice for most small business owners because consumer cards are protected by the Credit CARD Act.
Does the Credit CARD Act apply to business credit cards?
No. The 2009 Credit Card Accountability Responsibility and Disclosure Act protects consumer cards, not business cards. Business card agreements often allow issuers to change terms at any time, raise rates on balances you already owe, and apply penalty rates and fees without notice.
Are you personally liable for a business credit card?
Often, yes. Forming an LLC or corporation generally limits business creditors to business assets, but many business card agreements include fine print that makes you personally liable for the balance. In that case, late payments can still damage your personal credit score.
What are the benefits of a business credit card?
One advisor interviewed says business cards can help you build a credit profile for your business, since some issuers report activity under your business tax ID rather than on your personal credit report. She adds that some offer better sign-on bonuses, rebates on common business purchases and longer 0% introductory financing to help cover startup expenses.
What should you check before applying for a business credit card?
Ask whether you can easily meet the requirements to earn the advertised rewards, whether the benefits outweigh any annual fee, and whether the fine print holds you personally liable. If you go ahead, read the agreement carefully and plan to pay the balance in full each month.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.