4 Tips to Prevent Personal Liability With Business Credit Cards

Personal Liability Business Credit Cards

Are you starting up a small business? If so, there are many things you have to think about. You must consider variables like accounting, legal and tax concerns, and even what exact type of business you need to register. So it should come as no surprise that you could make a mistake that you will regret in hindsight.

The perfect example of a common “fork in the road” for business owners comes when getting business credit cards. This is a potential roadblock that many new business owners do not expect. Yet, the problems that could come up are sometimes extreme, which is why you must know what to expect ahead of time. One particular risk relates to putting yourself personally liable for your business debts. While this is fairly standard and most business card providers require a personal guarantee, you can find some workarounds to avoid this issue.

Personal Liability and Business Credit Cards

You might not be aware yet, but you usually qualify for business credit cards based on your personal credit. As a small business owner, this means you need to have good enough credit to qualify for a business credit card in the first place. Otherwise, it would be necessary to secure the credit card by giving a deposit of up to 100 percent of the card’s limit.

Even if you go the unsecured route, it’s possible that the card issuer reports your account to the major credit bureaus. Most of the time, this means Equifax, Experian and TransUnion factor your business card into your credit report and score. While you might think of this as a plus, it’s unfortunately a big problem.

How Business Credit Cards Can Destroy You

Say you took out a mortgage that’s fixed for five years, four years ago. What happens when you go to refinance?

Well, unfortunately, that all depends on the specifics of your business credit. Worst case scenario, you are unable to refinance your home because your credit rating suffers a dramatic drop. You can expect to see your score fall by upwards of 50 points just because of the new accounts. Even worse, if your running costs are sky-high, the card you need (even if secured) will cause your total debts to read sky-high.

Simply put, you DO NOT want your business credit card to mix with your personal credit information.

Avoid Personal Liability at All Costs!

This is not something you want to push aside, because chances are you will seriously regret doing so in the future.

Even if you have a $300 card for your business, you might find yourself increasing the limit later. This will just increase the amount of damage done to your FICO score. You cannot create a net-positive impact this way; surprisingly, this is the one scenario where it’s understandable for your credit rating to go up if you were to close your account.

Remember: Just because it’s a “business credit card” doesn’t mean they report to business bureaus!

Nevertheless, your business credit card is incredibly important. You will need to apply for one either way, but at least consider the workarounds that are available. Since there are many solutions, you do not need to assign personal liability to get a credit card for your small business.

Here are four quick tips that can help you out:

1. Find Card Issuers That Report to Business Credit Bureaus Only

You can get a card and only have it show up under one of the major business credit bureaus. To do this, you need to have a DUNS number for your business. DUNS stands for Data Universal Numbering System. This was created by Dun & Bradstreet, one of the major business credit bureaus. The other two major bureaus are Equifax Business and Experian Business.

2. Consider Alternative Financing Methods Instead

There are always other financing options available. One great workaround for small business owners is Amazon.com’s Corporate Credit Line. But when you get into these alternative options, you always have to consider whether the higher interest rate is really worth it. If you choose this option, look specifically for corporate credit lines through lenders authenticated by the Small Business Administration.

3. Incorporate or Register as an LLC

If your business is an LLC (Limited Liability Company) or a corporation, you can exempt yourself of some liability. This will not save you if your business credit card defaults. However, if you ever get sued it will exempt you from being financially liable. If you do not incorporate or register as an LLC, you will not get this protection.

However, things can get a little hazy. If you do get sued and you expect to lose big time, your business credit cards should be paid off and canceled. Doing this will prevent your credit from getting hurt if the claimant wins the lawsuit and your business debts default. This is a rare scenario and generally not something to worry about.

4. Move on to a Commercial Liability Card Later

It is possible to qualify for a commercial liability credit card once your business establishes a quality borrowing history. But you will need both a good personal credit record and a good credit report under your business’s file. This type of business credit card is backed by your business in the event of a default. Typically, you would do this if you run a larger business and you have major assets to back your corporate cards. After your small business develops a credit history and gains traction, it might be worth applying for a commercial card.




Credit Card – To Close or Not to Close

Credit Cards - Close or Not

If you have several credit cards and are trying to improve your credit score, it might sound like a good idea to cancel the cards you no longer use. However, in many cases, this action can hurt your credit score rather than help it. That’s why it’s important to ask yourself a few questions before you decide whether to close one or more credit cards. Consider the following details before you make a decision.

1. How Will This Affect Your Credit Card Utilization Rate?

Your credit card utilization is a big part of your credit score, accounting for about 30 percent of the overall score on your report. In general, you should keep your credit card utilization under 30 percent if you want the highest score you can get. This should be easy if you don’t keep a balance on your credit cards, in which case closing one or more shouldn’t affect your credit score.

But if you do owe money on one or more cards, be careful about closing those accounts, because this action will increase your credit card utilization rate. For instance, if you have two cards — each with a limit of $1000 and a balance of $200 — your utilization rate is 20 percent, which puts you on the path to having a great credit score. If you choose to close one card, your available credit on that card becomes zero, taking your utilization rate from 20 percent to 40 percent.

The best way to avoid this, aside from keeping both credit cards open, is to pay off the balance of the card you want to close. That way, your utilization rate will remain the same even after you close one account. You can also ask for an increase in your credit limit on the card you want to keep open, assuming you won’t be tempted to use the card more and increase that balance. So if you cancel a card with a $500 limit, increasing your other card’s limit by $500 can likely keep the closure from affecting your credit score.

2. Is This Your Oldest Credit Card?

If you want a good credit score, you need to have a long history on your credit report. After all, the length of your credit history makes up around 15 percent of your credit score. So if you are thinking about canceling your first credit card that you got 10 years ago, this action might decrease your score. This is especially the case if all of your other accounts are only five years old, since your credit history will suddenly go from 10 years long to just five years long. This is why you should refrain from canceling your oldest credit cards.

On the other hand, if you have several other accounts that are about the same age as the credit card you are looking to cancel, you probably won’t see much of a drop in your score at all. This is because your credit history will still be the same age as before.

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3. What Are the Downsides of Keeping Your Credit Card Account Open?

As you can see from the other two questions, canceling credit cards is not always the best option, since it can end up reducing your credit score. However, in some situations, closing a credit card account is the right choice, even if it will reduce your credit score for a while. For example, if you have a credit card you rarely or never use, and it has an expensive annual fee, closing it might be in your best interest. You shouldn’t feel pressured to keep paying the fee every year just in case closing the card drops your score.

In addition, if you feel tempted to use your credit cards just because you have the available credit, you should probably close those accounts. After all, increasing your debt with impulsive spending on your credit cards will quickly raise your utilization rate, which will reduce your score anyway. And of course, if one of your credit cards has a high interest rate, you probably shouldn’t be using it, which means closing it is a good idea. Consider transferring any balance to a card with a lower interest rate before closing the card. If you don’t have that option, simply close it and continue making payments on the balance every month.

If it turns out that closing one or more credit cards is the best option, you have to do more than just cut up the cards. To close the account, you need to call the credit card company and request that your account be closed. You can also follow up by mailing a letter confirming that you closed your account. Be sure to monitor your credit report after this to make sure the account shows up as closed. It might take about a month for your credit report to be updated, but once it is, it may be time to find out your new credit score to learn exactly how the closure affected it in the end.







The Pain Lives On –Unpaid Medical Bills and Your Credit Score

Medical Bills Affect Your Credit Score

A serious illness or injury can not only impact your physical and mental well-being, it can also hurt your credit score. Medical bills simply can’t be avoided in many situations, and sometimes, the amount you are expected to pay is quite high. Know you’re not alone. Medical debt has continually been the leading cause of bankruptcy in the United States. It’s not unheard of for up to 20 percent of Americans to hear from medical debt collectors in a given year.

Those numbers are staggering.

If you have unpaid medical bills piling up on your financial table, it’s important to understand when and how this will affect your credit score. Here’s all you need to know.

Unpaid Medical Bills Aren’t Factored Into Your Credit Score Right Away

Generally speaking, healthcare providers don’t report payments–or missed payments–to credit bureaus, as they usually have no direct relationship with them. If you are having trouble paying off the bill, and your healthcare provider does turn the bill over to an agency, it will then be calculated into your credit score. It will negatively affect your payment history, which makes up 35 percent of your FICO® score, and your current loan and credit utilization ratio, which makes up 30 percent of your score.

So, if you have an unpaid bill, what you need to look out for–and ask about–is when that bill will be handed to a collection agency. Because then it will start hurting your credit. Note that while hospitals and healthcare institutions give collection agencies more business than financial companies, that doesn’t mean they contact the agency if you’ve missed one or two payments. You usually get a reasonable amount of time, though that isn’t always the case with certain medical providers. The hospital or medical establishment could give you anywhere from a few months to a few years to pay the bill. Thankfully, the Healthcare Financial Management Association (HFMA) and ACA International are working to establish standards for medical debt collection in an effort for more transparency and less unwelcome surprises.

In order to avoid letting an unpaid medical bill go to collections, talk with your medical provider’s finance department immediately after getting the bill. Ask about financial assistance and attempt to work out a payment plan that fits your current economic situation.

How Much and for How Long Does an Unpaid Medical Bill Hurt Credit?

Depending on your current financial situation and the amount you have left to pay on the health bill, your score could be affected by as little as a few points to 100 or more points once it’s reported to a credit bureau, according to Anthony Sprauve, a FICO.com spokesperson. That’s a lot, and that will certainly impact your ability to get affordable loans and funding from financial institutions.

There is some good news, though. If the amount is less than $100, it will be ignored by FICO®. Moreover, while an incident like an unpaid medical bill being handed over to collections will stay on your credit for seven years, the impact lessens over time. If you practice good financial habits after the incident, such as paying off credit cards in full each month and cutting down on other debt, your score will also rise back up more quickly.

Additionally, although the FICO 9 credit score is not widely used by lending firms yet, it does not weigh unpaid medical bills as heavily. Such credit scores could become more mainstream in the future. Law changes in the future from government agencies like the IRS could also place limits on a medical institution’s right to turn over bills to debt collection firms, especially nonprofit healthcare providers.

What If the Unpaid Medical Bill Was Actually Paid, And Still Reported to Collections?

Healthcare systems are far behind financial institutions when it comes to tracking payments and keeping accurate records. There is simply too much disconnect between departments and systems, and sometimes this leads to a paid bill being mistakenly tagged as unpaid, and subsequently being reported to collections. It could also lead to a wrong charge and higher bill.

This is why Congress has been working to pass medical debt acts that give patients time to address inaccuracies before credit scores are hurt. If your unpaid medical bill is already being reported to credit bureaus, and you believe there is an inaccuracy, don’t throw your hands up in defeat. Take the following steps:

  • Gather documentation that proves the services rendered to you and/or the payments you’ve made.
  • Write a dispute letter to all three credit bureaus.
  • Stay in contact with those credit bureaus and your medical provider, and be ready to submit other evidence if requested.

While it you may not win this dispute, it’s certainly worth it. If you prove you’ve paid the bill or you’ve been wrongly charged extra, you’ll get the incident waived from your credit report.

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Keep on Fighting

Even if an unpaid medical bill has already harmed your financial health, know that the pain can be ended. Start by practicing good money habits, and, if that bill is still looming over you, try to negotiate payments and/or assistance. A billing advocate or lawyer can also help you negotiate bills and perhaps lower the amount to be paid.
Also, if you wish to see a higher score on your credit report more quickly, credit repair companies can help. Ovation Credit, for instance, can help clean up discrepancies and outdated information on your credit report, which will help boost your score in no time.