Kirk Brown put expenses for his small business on his personal credit card for years.
He paid the balance in full every month, while obtaining reward points for free airline tickets and reduced hotel rates.
“I haven’t bought an airline ticket for years,” said Brown, owner of Buck’s Shoes in downtown Fremont, Neb.
Brown thought it was a smart way to manage his money, but the practice hurt him when he applied to refinance his home in May.
Brown’s experience can serve as a cautionary tale for people who use personal credit cards for business expenses or to pay for large personal expenditures, such as college tuition and housing.
When Brown’s lender checked his credit rating it came back lower than expected because his business expenses had pushed his charge card balances near his credit limit.
Brown declined to say what his credit scores were, but he said the bank took the middle one of three.
“The highest would have been fine,” Brown said.
In the end, the lender increased the interest rate from 4.75 percent to 4.875 percent.
“I was just totally shocked,” Brown said. “I was under the impression that if you paid your bill off on time, then you’d be fine.”
Brown isn’t the first person to be surprised, said Craig Watts, a spokesman for FICO, the company that created the credit risk score used by many lenders.
Problems with credit ratings also can arise when parents use their personal credit cards to help their children with college bills or other big expenses, Watts said.
“One common question we get is, ‘I’ve never been late a day in my life, so why would my credit score be low?’” Watts said.
A credit score is a monthly snapshot of credit risk, and it doesn’t include everything, Watts said.
For example, credit card issuers typically report a person’s last monthly bill to credit rating companies such as Equifax and TransUnion. That report doesn’t include information on how much of that bill was paid each month, Watts said.
It does include any late payments and how much of a card’s credit limit was used, Watts said.
People want a perfect score, Watts said, but they don’t know that the amount of credit they use plays a big role.
Statistics show that people with highly leveraged credit cards are more likely to default, Watts said. That doesn’t mean every person who maxes out a credit card will default, he said, but it raises concerns for lenders.
A credit score is effective because “lenders need a faster way to rank risk than individually,” Watts said.
Does that mean people like Brown shouldn’t put business expenses on personal cards?
Cliff Mosteller, director of the Nebraska Business Development Center’s EntrepreneurShop in Omaha, said combining personal credit with business expenses is never a good idea, although many small-business owners do it.
“You never, ever take your credit card to the max,” Mosteller said, “even if you pay it off every month. It will decrease your credit.”
One alternative is a commercial line of credit, said Leon Milobar, director of the Nebraska district of the Small Business Administration.
“The interest rates and costs associated with a personal credit card are a risk,” Milobar said. “It’s much easier to set up a working capital loan with a financial institution that knows you.”
FICO recommends that business owners who use their personal credit cards notify their local lenders, allowing the bank or credit union to take that into account, Watts said.
And although this wouldn’t have helped Brown refinance his home mortgage, FICO and Dun & Bradstreet have partnered on a product designed to help banks assess the credit status of small businesses. Watts said the model blends a business’s credit information with credit information of the principals in the business.
“The very nature of small business — where business owners often mix personal and business activities — makes it difficult to identify changing risk in time to take corrective action,” FICO says in a summary of the product.
Brown, meanwhile, said he plans to obtain a business credit card. From now on he will separate his business spending from his personal spending.
Contact the writer:
444-1117, joe.ruff@owh.com
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