We had about couple of readers write in with credit questions over the weekend. They were wondering about their credit scores. Our first question is from reader Donna who wondered:

Will my Amex Gold Business Card (now at nationwide credit) affect my personal credit rating?

The company is now closed and the credit card in collections. I plan on paying it off, but I am curious to know how it will affect my personal credit?

Thanks for your question Donna. A business credit card will affect your personal credit rating if you are a personal guarantor for the card. By that I mean, if you used your social security number to apply for and get the card. That means that you are liable for the debt just like the business is, and that it will most likely be reported on your personal credit report.

Corporate credit cards are the only business cards that do not typically affect your personal credit score. Did you own the company? Or was it a corporate credit card?

Just to be on the safe side, we called Amex for you. Here is the information from the call:

If it is a small business (non corporate card) then the card is normally reported on the business owner’s credit reports. Amex reports business credit cards to all three credit bureaus monthly.

Corporate credit cards are a little different. American express has several different contracts for corporate cards, and you would need to ask your HR department which contract your corporation has with them – it may or may not affect your personal credit rating.

The best (and easiest) way to check and see whether or not this business credit card is affecting your credit rating is for you to check your credit reports at all three credit bureaus. You can view your credit reports for free each year by visiting Annual Credit Report.com.

If the account is listed on any of your three credit reports then you will know that your actions are affecting your personal credit score. If the account is not listed there, then you are in the clear.

If the account is listed on your credit reports, make sure you look over it. Has everything been reported correctly? Your limits? Your payments? The account closure? If any of the information is incorrect you may want to dispute the account, or the information listed.

We had another reader, Teddy, who asked about his credit limit reduction:

What can we do if the credit card company just lowered our amount to borrow, from 40,000 to 20,000? Will that hurt our credit score?

Teddy,

Yes having your credit limit reduced can lower your credit score. If you are not carrying a revolving balance on your credit cards, it will not hurt you too badly, but if you have revolving debt, then yes, it could be a problem. Here’s why:

Your FICO score (The primary credit score that lenders use) is composed of the following things:

• Your payment history – worth 35% of your credit score
• How much you owe - worth 30% of your credit score
• Length of your credit history - worth of 15% your credit score
• The types of credit you use - worth 10% of your credit score.
• New credit accounts - worth 10% of your credit score

How much you owe:
There is a catch to the “how much you owe” amount as far as your credit score is concerned. It’s not just how much money that you owe, it’s also how much of your available credit that you use. This is called your debt to credit ratio (How much money you are able to borrow vs. how much you owe).

When your credit limit was reduced, it affected your debt-to credit ratio. Here’s an example:

Let’s say you had $100,000 of borrowing power between all of your accounts, and you owe around $20,000. At that point you would be using up about 20% of your available credit. Well, what happens when your limit is cut in half for this card? Instead of a $40,000 line of credit you now have a $20,000 line of credit.

In this example it would reduce your overall credit to $80,000 instead of $100,000. If you had the same $20,000 worth of debt, your would then be using 25% of your available credit, even though you hadn’t charged another dime. This is what lowers your credit score.

What can you do about it?

Unfortunately, not much. Your lending banks control the limits on your credit cards. If you have a good credit score, you can apply for new credit, and not charge on the card in order to raise your available credit, and lower your debt to credit ratio. However, the new credit account inquiry will slightly lower your credit score at first. Over time, if you do not take on any new debt, then a new account might help to replace some of the old credit, and raise your score after the initial inquiry drop.

However, please keep in mind that much of this is theoretical. FICO guards it’s credit score formulas closely and only gives out the basics. I can tell you that if you are not carrying a high revolving balance to begin with, then having your limits reduced will not hurt your score much at all. The more debt you have, the worse a credit limit reduction hurts.

Thanks for your question.

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This entry was posted on Monday, April 20th, 2009 at 11:25 and is filed under Credit Score Repair FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.