Business Credit vs Personal Credit

Your personal credit score is created automatically after you open your first credit account. For many people, the path to personal credit begins with student loans or a student credit card. From there, each line of credit you open, like an auto loan or mortgage, is tracked on your credit report. The three major consumer credit reporting bureaus, Experian, Equifax, and TransUnion, use scoring models like FICO and VantageScore, which use the information in your credit report to assign you a three-digit score between 300 and 850.

Personal credit scores primarily influence one’s ability to obtain personal loans, credit cards, and mortgages. A higher score may lead to lower interest rates and better loan terms. Personal credit reports provide a snapshot of an individual’s creditworthiness, including information on credit card usage, loans, payment history, and any public records like bankruptcy. 

Business credit scores are determined by credit bureaus like Dun & Bradstreet, Experian Business, and Equifax Business. These bureaus use different criteria and scoring models tailored to assess a business’s credit risk. For instance, Dun & Bradstreet’s PAYDEX score evaluates a company’s payment history on a scale from 0 to 100, while Experian Business employs the Intelliscore Plus model, which ranges from 0 to 100 as well.

A business credit score affects a company’s ability to secure business loans, lines of credit, and favorable terms with suppliers. Strong business credit scores can enable a company to access larger amounts of working capital at lower interest rates, facilitating growth and operational stability. Conversely, weak business credit scores can limit a company’s financing options and increase borrowing costs, potentially hindering its expansion efforts.

Business credit reports encompass a broader range of data, such as company size, industry classification, years in operation, and financial stability. Business credit reports also include trade credit references from suppliers and vendors. This wider scope allows lenders and other stakeholders to assess the overall health and risk profile of a business more comprehensively when compared to a personal credit report.

There are several benefits of establishing business credit separately from personal credit.

• Secure higher credit limits: Business lines of credit and credit cards often have higher limits than personal ones. If you run a business that needs to regularly spend on inventory or operating costs, having a higher limit could prove invaluable.
• Keep expenses separate for tax purposes: Using personal credit cards to cover business expenses can create unnecessary complexity come tax time, when you need to unravel a mass of expenses and determine what’s attributable to the business.
• Access new funding opportunities: Having established business credit may mean you can access unique funding opportunities that aren’t available to those who only have personal credit.
• Protect your personal life from business liability: Personal credit is tied to your Social Security Number (SSN), while business credit is linked to your company’s Employer Identification Number (EIN). This distinction is vital for protecting personal assets from business-related debts and vice versa. Maintaining separate credit profiles helps ensure that financial issues in one area do not negatively impact the other. For example, if a business faces financial difficulties, the owner’s personal credit score remains unaffected, preserving their ability to secure personal financing.
• Receive more favorable terms from suppliers: Since your business credit score is the financial reputation of your business, suppliers may be more likely to trust that, if you have a solid business credit score, you can afford to pay, which could lead to more favorable terms.

As you understand the importance of managing both business and personal credit, you’ll want to take steps to ensure the highest scores possible.

• Understand your score and how it’s calculated: Since business and personal scores are managed by different credit scoring companies, you’ll want to ensure you understand the elements that make up each score.
• Monitor your score regularly: Check your business and personal credit scores at least once a year.
• Dispute any errors on your credit reports: Report any errors to the credit reporting agency and the creditor that reported the error. Even a minor issue with a payment marked as late could have detrimental impacts on your score.
• Make payments on time: Payment history is a big factor in both business credit and personal credit scores. A history of timely payments reflects positively on you as a qualified borrower.
• Keep credit utilization low: Credit utilization, or how much credit you’re using vs. how much credit you have available, is a factor in your credit scores. Prospective lenders prefer to see a lower ratio, often below 30%, as an indication that you’re a responsible borrower and not overleveraging yourself or your business.
• Diversify the types of credit you use: Lenders often want to see a healthy mix of credit, meaning you may hold both installment loans, like a small business loan or personal loan, and revolving lines of credit, like a credit card.

Is business credit score the same as personal credit?

No, a business credit score is not the same as a personal credit score. A business credit score evaluates the creditworthiness of a business entity, considering factors like payment history, debt levels, and credit utilization specifically for the business. In contrast, a personal credit score reflects an individual's creditworthiness based on their personal financial behaviors, such as paying personal loans and credit card bills on time.

Does business credit affect personal credit with LLC?

Generally, business credit does not affect personal credit when operating under an LLC (Limited Liability Company), because the business and personal finances are considered separate entities. However, if you personally guarantee a business loan or credit line, your personal credit could be impacted if the business defaults. When seeking a business loan with an LLC, lenders will assess both your business credit and personal credit. Ensuring strong financial management of both your personal and business finances is important to avoid any potential cross impact.