Avoid Tricks and Traps of the Credit Card Industry

Follow these tips to find the best card deal to conveniently cover your monthly business expenses

Avoid Tricks and Traps of the Credit Card Industry

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Like any other tool for your business, effective credit card use means careful analysis and firm control. A credit card is a loan. Evaluate it as you would any loan — and don’t get swayed by those tempting promises of low introductory fees, cash rebates and airline miles.

Why Use a Credit Card?

Even if you run your business primarily on cash, you may have monthly or annual payments that you don’t want to forget or delay — things like your photocopier lease, landline, cellphone bill, office lease payment, insurance premiums and so forth.

By setting up an automatic credit card payment for the item, you make sure those bills are paid on time. The other step is to make sure you pay off the resulting credit card debt. So set up your business bank account to pay the full amount of those fixed costs back to your credit card each month a few days before the card’s bill is due.

Your phone stays on, the credit card bill gets paid off each month, maybe you get some airline miles in the bargain, and you’re happy. (Not to mention that you get an itemized statement at the end of the year that will make your accountant happy.)

Why not just write a check or use a debit card for those expenses? Because you want them to be paid even if you’re so busy you don’t have time to eat lunch, let alone pay the phone bill. But there’s another reason, too: You don’t want automatic payments drawn from a debit account. A hacker can drain your bank account in a heartbeat, and the more entrances into your account (like automatic payments), the more vulnerable you are.

Of course, your bank will get you the money back, but it can be a massive inconvenience and you may have no cash at all for several days. But with a credit card, your liability in fraudulent transactions is limited to $50 if you report a problem immediately.

If your card offers additional warranty protections worth using, buy equipment this way — but only if you will pay off the balance immediately. But first, read the fine print and ask your lawyer or accountant when it’s a big piece of equipment; your dealer or manufacturer’s warranty might be just as good. Still, a card-based guarantee is worth asking about.

Business or Personal?

Of course you’re going to pay the business credit card bill from your business checking account; you already know that you need to separate business and personal expenses — which means keeping your business credit card for business only. That brings us to a more complicated wrinkle, though.

Some credit cards are specifically marketed as “business” credit cards — NerdWallet.com, Bankrate.com, CreditCards.com and CreditKarma.com all list various offers from credit card companies, with guides to finding cards with lower interest rates, good points-for-purchase structures or lower annual fees. Be aware that the sites have partner relationships with some of the card issuers and will highlight the offers of their partners — whether those are the best offers for Joe Business Owner or not.

And it gets trickier.

Your personal credit card comes with certain protections under the Credit Card Accountability Responsibility and Disclosure Act of 2009, or CARD. You can’t be billed twice in the same cycle; payments have to be applied to the high-interest portion of your debt if you have more than one interest rate; interest rate changes have to be announced in writing 45 days before they go into effect; and the company has to give you at least 21 days to pay the bill.

Business cards, however, do not come with these protections. The card company can raise your rate without notice. Your payments can be applied to the balance with the lowest interest rate first, which costs you more money over time. And rate increases can be applied retroactively, so what you thought you financed at 12 percent is suddenly being financed at 15 percent.

So can you skip using a “business” card and earmark a specific card to take advantage of CARD protections? Consult with your accountant and attorney first. You qualified for that card — even if all you use it for is business — based on your personal credit history.

It’s imperative that if you’ve incorporated your business to shield your personal assets, you must keep that distinction in use of credit cards as well. At the very least, don’t use the same card for business purchases that you use for personal purchases, not even once, or you risk exposing your personal assets to judgments against your business.

Getting the Best Card

Check for:

  • Interest rates. Look for the lowest rate possible, right? Yes — unless, and only if, your cash flow allows you to pay off the entire balance each month. Then you can focus instead on lowering other items, like the annual fee.
  • Penalty fees, over-the-limit fees, interest rate hikes. Read that boring fine print in the cardholder agreement, not just the hype in the card offer. Penalties for missing a payment and fees for exceeding your spending limit alone might not be so bad, but the real consequence is that your interest rate may go up. Look for the “default rate” — that can be as much as 10 percent more than the standard rate.
  • Rewards. Will you really use them, and do they justify the annual fee? If there are so many exclusions and qualifications that you only get $10 worth of rewards over three months, that $75 annual fee doesn’t look like such a bargain.
  • Keep checking. Frequently review the terms of the cardholder agreement you have and compare it to what’s currently available elsewhere.

Balance Transfers

It looks great: Open a new account at a lower interest rate, transfer a big chunk of your outstanding balance to the new card, and you’re paying less interest. Win-win, right?

Well, maybe. If you haven’t opened a new account in a year or two, and if your credit is excellent, then this can work well. But credit scores are calculated partially on the basis of total utilization — meaning if you have $100,000 total credit available now and your balance is at $80,000, a new company may grant you only $20,000 additional credit.

You then transfer $20,000 to the new card — but you’ve still got $60,000 at the higher interest rate.

Also, that wonderful lower rate isn’t forever. Check for the difference between the card’s introductory rate and the standard rate, and how long the new rate lasts. If you can realistically pay off the transferred balance while the introductory rate is in place, then it might be a workable solution. If not, don’t borrow trouble.

The bottom line: Credit cards can help streamline payments you need to make no matter what, but you need to manage debt carefully and keep a careful eye on card agreements to make sure you’re not paying more in fees and interest than you’re getting back in rewards.


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