Many companies use credit cards to cover the expenses of everyday business. They can be used to buy supplies or inventory, to pay for overhead and to pay for business-related travel. However, interest rates that are associated with all credit cards cut into a business’ bottom line. Because of this, every company is looking to find those business credit cards that have the best rates. The best rates can be found with a sound credit history and some careful research.
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While businesses can benefit from the convenience of credit cards, they must also beware, as business credit cards are not protected from unfair or deceptive practices like consumer credit cards; this can really affect interest rates. Credit cards for a business can also affect a small business owner’s credit rating just like consumer credit cards.
How Business and Consumer Credit Cards are Similar
All credit cards use credit, and most credit card companies want to assess the risk of the user to make sure that borrowed money will be repaid. With consumers, lenders use a person’s credit history to establish risk. A credit history that shows responsible use of money and on-time payments represents a smaller amount of risk than a history that shows late payments and defaulted loans.
Higher risk means higher interest rates, and not all consumers will qualify.
Conversely, a large business has its own type of credit rating that is used to assess risk. Furthermore, the attraction of a large amount of transactions helps big businesses to attract more credit card offers with lower interest rates; the credit card companies want the business. However, small businesses do not have the buying power and credit rating to attract credit card companies. According to the Small Business Association, the credit history of the owner of most small businesses is used to assess credit risk.
This essentially ties the business owner’s credit history to the business, and it can be financially damaging to both entities. If the owner’s credit is poor, then the interest rate on the credit card will be much higher, eating into profit margins. Similarly, if the business is performing poorly and credit card payments cannot be made on time, then the owner’s credit history will suffer.
Unfair Differences between Consumer and Business Credit Cards
While a person’s credit can both affect and be affected by credit cards alike, the similarities about end there. Unfortunately, business cards do not have the same protections that consumer cards do. In 2009, the federal government passed legislation aimed at protecting consumers from unfair practices by credit card companies under the Credit Card Accountability, Responsibility and Disclosure Act. The Act restricted fees, set controls for changes in interest rates and conformed billing practices; the act set no protections for business credit cards. Furthermore, credit cards used by businesses aren’t even subjected to the Truth in Lending Act of 1968.
Without protections and laws in place, credit card companies can still get away with a number of unscrupulous practices concerning their business card accounts. Credit card companies can stack fees, change interest rates, and manipulate due dates and times to make a user’s payment late. They can use vague language or hide some terms of the contract in an effort to confuse their customers. All of this boils down to interest rates that can change at any time or for any reason.
Average 2012 Business Card Interest Rates
Due to lack of protections and variations in owners’ credit ratings, interest rates for business credit cards will vary. Information compiled by the Federal Reserve put the average business credit card interest rate for 2011 at 15%. FoxBusiness.com lists the average for 2012 so far from 14.74% to 15.53%. A business owner who charges $10,000 on a credit card can expect to pay at least $1,474 in interest.
Furthermore, business owners do not have protection against interest rates that rise to exorbitant levels for no reason. Credit card companies can charge whatever rates they choose; many will start with low, introductory rates to lure customers and then jack those rates up as they see fit. Furthermore, penalty rates can soar into the 20% to 30% range and beyond due to a late payment; actually, the credit card companies can charge a business credit card holder any interest rate they want regardless of rhyme or reason.
Getting the Best Interest Rates
However, many business owners can get a better interest rate than average. Improving credit history and making on-time payments can help to make interest rates as low as possible. The lower a card’s interest rate, the less that credit card payment is eating into profits.
Furthermore, business owners should not forget about introductory interest rates. Many credit cards include a teaser rate that looks good to business owners. However, teaser rates will end, and there are no restrictions as to how long or short, that rate will last.
Business owners should replace any credit card that employs unfair or deceptive practices with one that plays the credit game fairly with all customers.
Lastly, business owners need to research credit cards to find those with the rates that are below average. Getting the best rates is just good business.
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