In May, the Federal Reserve released proposals for limiting the circumstances under which lenders could increase interest rates on existing card balances. The limits would apply to personal cards — including any business expenses charged on them — but not to business cards, a Fed spokeswoman said.
Small-business card lenders generally grant initial terms on the basis of personal credit, with consideration of any business payment scores.
Business card usage is sometimes reported to personal credit bureaus. This can decrease a personal credit score, known as a FICO score because it was created by the Fair Isaac Corporation.
Ms. Landis said some of her business card activity had appeared on personal credit reports. And FICO decreases can also result in higher business card rates, she said. “I know because I ran up a balance on a personal card while traveling, which dropped my FICO, and the rate on one of my business cards immediately went from about 18 percent to 23 percent.”
Jason Peringer, a certified massage therapist on Martha’s Vineyard, said he discovered the connection between personal and business credit after his home burned down.
A construction loan and a houseful of new furnishings that he put on personal cards — purchases required before an insurer would partly reimburse him — increased Mr. Peringer’s debt-to-income ratio and lowered his credit score, he said. American Express cut his business card limit to $1,000, from $15,000, and the Advanta Corporation raised his business rate to 34.99 percent, from 16.99 percent, he said.
“I had never missed or been late on any payments,” he said.
There is not much data about card charge-offs — the debt that lenders write off as uncollectible — stemming from small business. The Federal Reserve found that charge-offs for all commercial bank cards rose in the second quarter, reaching 5.47 percent. Neither the central bank nor most large lenders break out business card charge-offs.
But Advanta, which markets MasterCards exclusively to small businesses, reported second-quarter charge-offs of 8.38 percent, up from 3.48 percent a year earlier. Advanta said it was one of the largest small-business card issuers last year.
Entrepreneurs get the most out of cards when they regularly pay off their balances. “Many of my clients use them, but in a limited way in the early stages,” said Michael Gonnerman, a financial adviser in Boston to high-tech entrepreneurs.
Timothy Ferriss, author of the best-seller “The 4-Hour Workweek” and a business consultant in San Francisco, began his entrepreneurial career selling a sports nutritional supplement. He said he had already done market testing and secured customer commitments when he put $10,000 in manufacturing costs on personal cards in 2001.
He said he had charged about 70 percent to an American Express card requiring monthly payment in full. The rest went to zero percent introductory rate cards that he paid off within three months. “I avoided depending on self-discipline, which entrepreneurs often overestimate.”
Today, Mr. Ferriss said, he often asks customers to charge their payments. Even if he must accept slightly less, he prefers the immediate payment to managing the cash flow problems of extended payment terms.
Entrepreneurs may pay dearly if they fail to understand their small-business card agreements. Victor Patenaude, a collections lawyer in San Diego, wrote in an e-mail message that he had obtained “thousands of judgments” against entrepreneurs who could not pay their business card debt. “Last week, an attorney called up, guns blazing, and said we will lose at trial if we think her client is personally liable,” he wrote. “After I faxed the application and pointed out the small print, she fired her client and suggested he pay us.”
Marc Augustine, a consumer electronics exporter in Miami, said he had negotiated a bank credit line and several cards without personal liability by building a solid history of borrowing and rapid repayment. He said he was concerned about a friend, already the owner of one business, who has put $30,000 on personal cards to start a new venture.
“I speak to him, but he says he has to have it now,” Mr. Augustine said.