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Merging business and personal credit can be risky

Like consumers, businesses in Michigan cannot always afford to make all of their purchases in cash. Just as individuals might turn to their credit cards come the holiday season, businesses may also rely on credit to keep things going. A small-business credit card is often a smart solution.

However, one must be careful not to tie his or her personal credit too closely to his or her business credit, especially in the beginning stages of business formation and planning.

For instance, if one were to establish a sole proprietorship, supplying his or her own name as the business name and his or her own social security number as the employer identification number, his or her personal credit would be closely linked to that of the business.

One potential hazard of this arrangement is that, in the event that the business is unable to make its card payments, the proprietor's personal credit score will suffer. Furthermore, business credit cards are not covered under the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009.

The CARD Act, which covers all personal credit cards, protects consumers from harmful practices such as unannounced and retroactive interest rate increases and egregious fees. Tying one's fate to that of a small business, especially when such dangers exist for business credit accounts, is a risky choice.

Also, on the flip side, maintaining a healthy business credit history does little to bolster one's personal credit. Most credit card issuers report only delinquency to personal credit bureaus. Consistent payments made on business cards are reported only to the commercial bureau and are not reflected on one's personal credit report.

In the early stages of a business start-up, when the long-term success of the business has yet to be demonstrated, keeping personal and business credit separate might be a safer choice. Knowledge of credit card debt implications may be useful in deciding which type of business entity to choose. Sole proprietorship is just one option.

Source: Fox Business, "Don't Make Business Credit Card Personal," Janna Herron, Aug. 15, 2012.

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