Will Business Debt Hurt Your FICO Score?

Businesses, like individuals, may take on large amounts of debt. As with personal debt, this business debt must be paid back to lenders on time or the business faces collection actions from creditors. Some businesses even have their own credit rating, either issued by a consumer credit reporting agency, such as Experian, or by a business credit reporting agency, such as Moody's. Unless the owner of a business takes out credit in his own name, this debt should not affect his personal credit rating.

Credit Ratings

Personal credit scores, sometimes called FICO scores, are measurements of an individual's creditworthiness, as determined by credit reporting agencies. The information used to calculate a person's credit score is contained in his credit report. All information related to loans taken out in an individual's name is included on his credit report. Credit taken out in the name of a business is not included on the report and does not affect the individual's score.

Securing Loans

Every loan has a borrower. Some loans taken out to pay for business expenses may not, technically, be borrowed by the business itself. In many cases, particularly with small businesses who have not established an extensive history, it is the business's owner who signs on as the borrower and securer of the loan. If an owner does so and the business defaults on the loan, the owner's credit score will be affected.

Different Types of Companies

Whether a business debt can harm your FICO score also depends on how the company is structured. With companies structured as corporations, limited liability partnerships and limited liability companies, the credit score of the owners is not affected by the company's debt. For example, shareholders of Ford Motor Co. will not have their FICO score go down if Ford defaults on a loan. However, owners of a sole proprietorship are considered synonymous with their company; if this company goes into debt, their personal credit scores suffer.

Business Credit Ratings

Many businesses are assigned ratings by credit reporting agencies, too. However, unlike FICO scores, which are numerical, large businesses are assigned letter grades to indicate their relative creditworthiness. These grades constantly change based on changes in the economy and the company's financial health. If a company takes on too much debt, its credit rating, like an individual's FICO, may drop based on increased fears that it will default.