Understanding Business Credit Cards for Small Business Owners
Banks are still hesitant to lend to small businesses with less than stellar credit, although they are making more loans available to those with pristine scores. These institutions are, though, now trying to woo small business with credit card offers. Is this a change of heart? Not really as 42% of small businesses have some sort of credit card balance, according to data from the NSBA in DC.
On the one hand this does give more spending power to the small business owner, and even a way to improve credit if payments are made in a timely manner. The problem is that, unlike personal credit cards, business credit cards do not have the protections granted the former through the Credit Card Accountability Responsibility and Disclosure Act of 2009 that outlawed random interest hikes on personal credit cards among other safeguards.
According to the CEO of CardHub.com, card issuers cannot raise the interest rate on existing personal balances unless the cardholder is at least 60 days behind in payments, whereas business credit cards are fair game. Then, also, if a small business card is carrying two different rates (one on purchases, another on balances) the bank can use a payment to pay off the lower rated balance, thus continuing to carry a balance on the higher interest rate, which of course makes more money for the bank.
Another impact of the business credit card is that it can have an effect on your personal credit. Even though these cards are assigned to a business entity, if you, the owner, don’t make payments on the card’s balance, it will be your personal credit that will take the ding, thus lowering your personal credit score.
Let’s give ‘credit’ where ‘credit’ is due though. Bank of America and to a lesser extent Capital One have chosen to apply the provisions of the 2009 law to their small business credit cards, but most major lenders haven’t, so beware when signing up with other card companies.
Despite the risks, some experts say small business credit cards are among the safer financing options for small business owners right now. For most small business owners, loans are still hard to come by, and most business loans require collateral of some sort. Credit cards, on the other hand are unsecured debt, which means the owner doesn’t have to put his financial life on the line to garner the credit. Other benefits to paying with plastic are being able to track one’s expenditures, building one’s credit and the rewards given by the lender.
Good credit could lead to a good credit card offers but here are some reasons why not use credit cards:
Reasons NOT to USE CREDIT CARDS.
Reason # 1: Credit Cards debts are UNSECURED and REVOLVING; therefore, it affects your personal credit score for business or personal.
Reason # 2: Credit Card Agreements are one of the few finance agreements that actually have a stated in the fine print the bank may change the term of the agreement at their will anytime during the term.
Reason # 3: Under the recently passed law called Universal Default, many credit card companies can raise your interest rate if late payment is posted on your credit report by any of the other credit card lenders.
Reason # 4: Same Law that recently passed, Credit Card Company can choose to have a higher minimum monthly payment, making it less affordable to some.
Reason # 5: Again using credit card affects the overall credit score. What does low credit score cost you and your business? A low credit score on your bureaus will not only cost you higher interest on your next credit cards, it can also affect how much you pay for
- Auto Insurance
- Life Insurance
- Medical Insurance
- Disability Insurance
- Establishing new accounts for business trades
- Workers’ Comp
- Acquiring or Bidding for new Contract
- And many more…
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