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Choosing the
Right Credit Card for Your Small Business
-January, 2011

 

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Along with a pile of holiday greetings, catalogs and sales circulars from local retailers, daily mail is heavy with all kinds of credit card offers. In fact, first quarter 2010 small business credit card offers increased 256 percent compared to first quarter 2009 (that’s 47 million business card offers) says a report by London-based research firm Synovate. From zero percent interest introductory offers to rewards points, finding the right card, and more importantly, the right rate is a challenge not for the faint of heart.

Do you need a credit card?

A May 2010 Federal Reserve report issued to the U.S. Congress stated that “83 percent of small businesses used both their business and personal credit cards to finance business expenses.” Small business credit cards can serve a wide range of purposes. While not the most advisable way to launch a business, credit cards can be a much easier and faster way to increase purchasing power and launch a business than trying to secure a bank line of credit. Credit cards also help new businesses establish creditworthiness separate from
the business owner.

What are your spending habits and needs?

Considering how you will use the card can help you determine the interest rate, fees and type of card. Generally, there are two types of cards, a revolving credit card where the unpaid balance carries from month to month and a charge card like a basic American Express card which requires payment in full at the end of each billing period. If the card isn’t paid in full or on time, the interest rates could incur substantial charges.

New rules applying to consumer credit cards from the Credit Card Accountability Responsibility and Disclosure (CARD) Act require credit card companies to disclose how long it will take to pay the entire
balance if only the minimum payment is made each month. Creditors must also give 21 days between each statement and are required to provide all interest charges, fees and changes to the interest rate up front.

The snag in the Act is that many of the CARD provisions don’t apply to business credit and charge cards. Business to business transactions are excluded from CARD and can leave small business owners holding a hefty price tag for late payments in penalties and soaring interest rates. This is a credit card industry practice called ‘penalty pricing,’ which involves charging consumers steep payments and high interest rates.

Among the nation’s big banks, Bank of America (BOA) was the first to step up their small business credit card program to include many of the CARD Act provisions. Effective May 2010, BOA’s small business credit card customers were informed that they would also enjoy CARD benefits like lower fees for going over card limits, applying payments to the portion of balances with the highest interest rates and not retroactively raising the rates on their over 2 million business card holders. The bank is also providing at least 45 days notice of future rate changes and a minimum of 25 days grace period between the end of a billing cycle and the payment due date.

What’s the rate?

All of those direct mail offers dangle tempting zero percent interest and no fees as a way to attract customers, but read the fine print and you’ll quickly realize that the offers are usually too good to be true. Often the introductory rate is for a short period of six months, after which time the interest rate skyrockets to eighteen percent or higher. Store credit cards like Sears carry rates in the mid-twenties, so read the fine print and know what you’re agreeing to before you sign the application. Thanks to CARD provisions, terms on personal cards must also be locked for a minimum of six months after which time the creditor can change the rate only on new balances and not existing balances.

If you choose a credit card with a rewards feature, be selective on which card you select and try to resist the temptation to over spend just to gain rewards. Reward programs can be a great feature for small business owners that travel extensively. From free nights at hotels to flight upgrades and other perks, the benefits can be well worth the increased interest rate or annual fee that typically comes with reward cards. “According to Bankrate.com, all variable rate cards averaged an APR of 10.8 percent, while cash-back cards averaged a rate of 13.9 percent,” says a report by Mellody Hobson, financial consultant for Good Morning America. Some reward programs are very restrictive making cashing those rewards points in as difficult as possible. One last warning about rewards, if you fail to make timely payments, creditors can revoke rewards already earned in addition to assessing fees and penalties.

Compare cards and save.

There are several web sites business owners can check to shop for the best credit card rates, terms and rewards programs. CreditCards.com and CardRatings.com, and Bankrate.com are the top three.
A new entrant, Billshrink.com features reviews on 48 to credit cards from major issuers and recommends a card based on consumer supplied data like size of the business, amount of annual spending and other details.

Having a business credit card can be a great tool in making travel arrangements, gaining ‘free’ rewards and bonus points, and simplifying business purchases. Just be sure that you fully understand the credit card’s terms and avoid costly late payment charges. To learn more about the best types of business credit cards for your small business, talk with a Fiducial Advisor by calling 866-Fiducial or visit the web site at www.Fiducial.com.