Tinkering: Mixing Your Business & Your Credit

 

As we’ve bumped into when talking about your credit before, there’s even more information on credit that the savvy self-employed homebuyer needs to be aware of and it’s time we took a deeper dive on a few of those items.  If you are self-employed you may think that your company is a separate entity from yourself and likewise assume the business’s credit standing is completely separate as well, and why shouldn’t you?  It seems logical; it’s plain common sense--- Right? Your business probably has a separate bank account, debt in the company’s own name, and may even have a separate tax ID number and file a separate tax return.  So, from the outside it can seem as though your business’s credit standing should have no impact on you personally, but this isn’t always the case.  Credit and lending don’t always go the route of common sense; they follow the law, regulations, and guidelines.

Today we’re going to talk about different types of business credit (aka debt), how each of them may impact your personal credit report, credit score, and tips on how you can avoid any negative implications to your personal credit.

Types of Business Credit:

1.       Business credit with a personal guarantor – This is the most common type of business credit because, as Gerri Detweiler of Nav.com explains (you can find her on Twitter @gerridetweiler or @navSMB and online at www.nav.com), most small business credit cards require the owner to personally guarantee the debt.  That means if the business doesn’t pay the bill, the owner is personally responsible.

How this type of account can impact your personal credit – Since this type of account is personally guaranteed it may also be reported on your personal credit report.  Mark Yoder of Old Republic Credit Services (you can reach him at myoder@orcredit.com or at 888-895-5145 ext. 300) tells us that different creditors report these accounts on personal credit reports under different circumstances.  For example, American Express and Capital One will report all activity where Citibank, Bank of America and Wells Fargo will only report in the event of negative activity or default.

A business account that reports on your personal credit report will be treated the same as any other account in the credit scoring model.  Therefore, if it’s only reported in the event of negative activity or default, this could potentially mean disaster for your personal credit score.  Don’t forget that having your credit pulled to apply for credit as a personal guarantor will also hit your credit as a hard inquiry and that too will knock your score down a few points.

 

1.       Corporate credit cards – A corporate credit card is an account that the company is responsible for with additional credit cards issued in employees’ names for company expenses.

 

How this type of account can impact your personal credit - These are very similar to the authorized user accounts we talked about last time, and like authorized user accounts, these can also show up on your personal credit report.  Typically, corporate accounts have a strong pay history and credit utilization which can help your credit.  However, in the event that there are late payments or a high balance that is having a negative impact on your credit score, you most likely will be able to get them removed.

 

1.       Personal accounts used for business purposes – This is just what it sounds like, a personal account that a business owner has decided to use for business purposes.  It’s not uncommon for a small business owner to choose to utilize this type of credit as an alternative to a business account.  This is commonly referred to as comingling of debt (aka a fancy word for combining or joining together your business and personal debt).  Brian Moran from Brian Moran & Associates says that comingling debt is never a good idea (you can find Brian on Twitter @BrianMoran or online www.smallbusinessedge.com ).  I happen to think that is great advice. Not only could it impact your credit, but it could also impact your debt to income ratio and impact how much home you can be approved to purchase. 

How this type of account can impact your personal credit – This account is no different than any other personal account and will impact your credit in the same way.  Be cautious of credit utilization remembering that the greater the percentage of available credit you use, the more negative impact this can have on your overall credit score.

 

 

The good news is, with a little bit of planning your business credit does not have to be a looming cloud over your personal credit, and can even work for you if you take the right steps.  Here are a few tips to help manage your business and personal credit in perfect harmony:

·         Find out the creditor’s reporting practices before you apply for credit to avoid any unnecessary hard inquiries that will drop your credit score

·         Choose a creditor that reports the activity that will benefit you:

o   If you will have low credit utilization and could use the boost of additional trade lines reporting on your personal credit you may want to choose a creditor that reports all activity

o   If you know you will be close to maxing out your account balance each month with no risk of late payment, then selecting a creditor that only reports in the event of negative activity may be of more benefit to you

·         Be sure to always pay any business debts from a business account and not from a personal account so that the business debt does not impact what you personally can afford to purchase (AND, keep good records!  Your lender is going to want 6-12 months of consecutive cancelled checks showing that the business, in fact, pays the debt and not you personally or the debt will be counted against you for qualifying purposes…..skip even one month of having the business pay that debt and it becomes a personal debt for mortgage purposes; regardless of how you file it on your tax returns.  That is a double whammy --- it reduces your income and it is counted against you in your debts.  Don’t make this costly mistake.) Mark Yoder at Old Republic suggests that anytime you leave a corporate job where you were issued a corporate credit card to treat it like a divorce.  Upon separation from the company request that the account be removed from your name and credit report as well as documentation that this has been completed.  He states that this is much easier to have done at the time of separation than later down the road after it may have become a problem.  You may not expect your previous employer to go under or default on their bills, but it’s better to be safe than sorry.

·         If you are using personal credit accounts for business purposes, you may want to consider obtaining a business account with a personal guarantor.  If you follow the tips above this can give you more control to choose how your personal credit is impacted.

 

Join us next time as we explore more in the world of mortgage lending. If you have a burning question or just want to chat -- I love to be social……you can reach me on Twitter (@TheGlickTeam), email eglick@Starkeymtg.com, at the office at 912.721.9408, and my website at www.TheGlickTeam.com .

As always, if you liked this article please like, share, or comment…….or all of these things; they are greatly appreciated.

 

Eric Glick, Senior Loan Officer, Branch Manager

NMLSR#544398, GA LIC#32997

Georgia Residential Mortgage Licensee

www.TheGlickTeam.com

6600 Abercorn St #105, Savannah, GA 31405 NMLSR#544398, GA Lic#32997

 

EQUAL HOUSING LENDER

WR Starkey Mortgage, LLP, 6101 W. Plano Parkway, Plano, TX 75093 (NMLS#2146) 1-866-599-5510 Copyright©2016 All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify.   Information, rates, and programs are subject to change without prior notice.  All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts.  Other restrictions and limitations may apply.  WR Starkey Mortgage, LLP is required to disclose the following information: Georgia Residential Mortgage Lender Licensee No. 19715, Florida Mortgage Lender License #MLD1043, North Carolina Mortgage Lender License No L-112550, South Carolina Mortgage Lender License No. 2146, NMLS ID# 2146 (www.nmlsconsumeraccess.org)