Business credit cards provide numerous advantages. They serve as ready cash, allowing you to make business-related purchases with ease because they are often easier to obtain than a traditional loan or credit line.
Business credit cards typically have a higher spending limit than personal credit cards. Other benefits, such as primary rental car insurance, no foreign transaction fees, airline benefits, and access to airport lounges, make them even more appealing. Even with these benefits, using a business card to pay for personal expenses can pose risks to you and your company.
In the rush of trying to get things done, the lines between business and personal life can become blurred. Putting personal purchases on your business credit card is not illegal.
Making personal purchases on a business credit card, on the other hand, is likely to violate the terms and conditions of your card agreement, which can have serious consequences. Personal and business expenses should be kept separate as a general rule.
What is a Business Credit Card?
A business credit card is one that is intended for use by a company rather than an individual. Businesses of all sizes can apply for business credit cards, which can help them build a credit profile and improve future borrowing terms.
Business credit cards frequently come with special benefits, like, higher credit limits, greater rewards potential and tools to help you manage spending and employee cards. But they lack some of the consumer protections that are required on personal credit cards.
Who Is Eligible for a Business Credit Card?
Self-employed individuals, freelancers, and even those with a side hustle. You can use your own social security number to apply.
As long as you can show that you have an income stream from your business and that you are likely to be a responsible cardholder who pays your bills on time, issuers should take your application seriously.
According to the most recent New York Federal Reserve report, the credit card application rate increased to 27.1% in October 2022, up from 26.5% last year and above its pre-pandemic reading of 26.3% in February 2020. However, mortgage, refinance, and auto loan application rates fell during the same time period.
8 Consequences of Using Your Business Card for Personal Use
So, what are the consequences of violating the issuer’s no-personal-purchases policy? It really depends on how you use it.
In most cases, it is difficult for an issuer to distinguish between personal and business purchases.
If your business credit card issuer believes you have been abusing its card policies, it may decide to close your account. Because issuers have complete control over who they lend to (and for how long), that closure could occur without notice or opportunity to appeal.
You could even lose any rewards you’ve accumulated along the way.
The following are the consequences of charging personal expenses on your business credit card:
1. Personal Expenses
Personal expenses on a business credit card are not illegal, but they should not be done. Not only that, but using a business card for personal expenses can complicate accounting and tax preparation.
Consumer credit cards are protected by the CARD Act in ways that business credit cards are not. Using a business card for personal expenses means foregoing those safeguards entirely.
2. Business Trips
Just because you’re on a business trip doesn’t mean that every expense should be charged to your company credit card. For example, entertaining clients is a legitimate expense within limits, but getting a expensive watch on a business credit card is not.
If you’re unsure about what is and isn’t a business expense, Internal Revenue Service (IRS) also provides several online resources to assist you in distinguishing between legitimate business expenses and those that cannot be claimed as deduction on your business tax return.
3. High-Risk Investments
Remember that you’re trying to expand your business capital, so don’t use a credit card to fund high-risk investments. Keep in mind that your investment can go down as well as up, and you will be charged transaction fees. That would lead to a mountain of high-interest debt.
4. Cash Withdrawals
Cash withdrawals means you’re borrowing money from your credit card to meet your business needs. However, there are fees associated with obtaining a credit card cash advance, as well as limits on the amount you can withdraw in some cases.
You begin paying interest the moment the money leaves the ATM. You will be charged cash advance fees as well as a higher APR on the cash advance amount. You will not be given a grace period, and interest will begin accruing on the same day.
5. Cancellation of Your Card
When you apply for a business credit card, you agree to the terms and conditions of using your account. “Most business credit card issuers will require you to sign an agreement stating that you will not use your business card for personal expenses.” Furthermore, if you violate the terms of your agreement, they have the authority to cancel your card.
Here are some examples of this language from well-known business cards:
From American Express — “Each Cardmember acknowledges and agrees that cards are intended to be used for the Company’s commercial or business purposes.”
From Ink Business Preferred Credit Card — “I certify, understand and agree that … this is a business account which shall be used only for business purposes and not personal, family or household purposes.”
6. Affects Your Credit Score
You might be tempted to use your business credit card for personal purchases in order to improve your consumer credit score. However, if you are unable to repay them, your personal credit score will suffer and you will soon see your credit score drop.
This is because you must sign a personal guarantee before receiving your business credit card.
7. Losing Track of Business Expenses
When you combine personal and business expenses on business card, it becomes more difficult to understand your company’s needs and overall financial health.
It is critical to keep your expenses separate. If your personal expenses are mixed in with your business expenses, you will not be able to obtain funding until you sort out your accounts.
8. High-Ticket Items for Business
Regardless of whether you have enough credit on your card, you should only use business credit cards as a last resort to make large business purchases.
If you carry a balance on your card, you may incur significant interest charges. Currently, the average interest rate on a business card stands at 16.07 percent, lower than the national average credit card APR of 18.16 percent but still potentially higher than a loan’s APR.
Business Credit Cards are Exempted from Credit CARD Act of 2009
The CARD Act does not cover business credit cards, so it is best to avoid using them for personal purposes. The Credit CARD Act of 2009 established a number of regulations to protect consumers from abusive credit card issuer practises.
Business credit cards, on the other hand, were exempt from the CARD Act. This means that business credit card holders do not have to be notified before their interest rates are raised, among other things.
FAQs
Is an EIN required to apply for a business card?
To apply for a business credit card, you can use either your EIN or your SSN.
What is the difference between a business credit card and a personal credit card?
Business credit cards are designed for people who earn a living from their businesses. Personal credit cards are intended for individuals rather than businesses. Rewards and perks for business and personal credit card customers may differ.
What are the advantages of a business credit card?
Benefits include lucrative welcome bonuses, day-of-travel perks such as free checked bags or lounge access, and the ability to earn bonus points or miles on everyday purchases, among other things.
What happens if I accidentally use a business credit card for a personal purpose?
Accidents occur. Pay off the personal expense as soon as possible, and mark it so that it is not included in any of your business’s bookkeeping.
If you are not the sole proprietor of the business, you will also need to consider how you will report the error to the appropriate parties in the business.
Bottom Line
Finally, the answer to whether you can charge personal purchases to a business credit card is: technically, you can, but you shouldn’t.
When you signed up for the card, you agreed to use it only for business purposes, so even a suspicion that you’re doing something wrong could result in a closed account and lost rewards.
You’ll likely get much better rewards for most personal purchases if you use a consumer rewards credit card rather than a business card.
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