How to Cut Credit Card Costs
Anyone that has attended a sporting event is familiar with the directive to "Be aggressive!" In today's tightfisted lending climate, that's exactly the advice small business owners should heed when seeking ways to reduce credit card costs.
In the past several years, many small businesses felt the sting of rising interest rates and fees, slashed credit lines, and banking institutions that were slow to lend. Add to that the frustration of not being included in protections currently being enjoyed by consumers as a result of the Credit Card Accountability, Responsibility and Disclosure Act, or CARD Act, it's not hard to imagine that small business owners are fed up with credit agencies.
So how can small businesses not only rebound but gain the upper hand? The answer is shopping around, says Scott Testa, Ph. D, an associate professor of business administration at Cabrini College in Philadelphia. An idea that Bankrate.com's Senior Analyst Greg McBride agrees with. "By comparison shopping you're going to uncover the best deals around that are out there and put yourself in a position where you can command the best terms that are available in the market," says McBride. Here are some tips to keep in mind when you're comparing your options.
1. Consider Cards with the Lowest Rates and Less Fees
Small business owners should look for cards offering low interest rates and affordability. Check out sites such as CreditCards.com and Bankrate.com, which offer comparison lists of credit cards and their interest rates. Also do a comparison of rewards offers and any fees attached to utilizing those services, which can be an integral piece of managing aspects of your business, such as paying for products and services, travel costs, as well as cash back. "Look at the whole package and see what's important and what makes sense," advises Testa. If you have multiple cards some features may be duplicated and present an opportunity for you to reassess and negotiate terms. Don't be afraid to call up the credit agency and ask for better terms. "You don't get what you don't ask for," says Testa.
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2. Be Wary of Using Your Personal Credit Cards for Business
While entrepreneurs may be used to the commingling of personal and business funds—especially in the start-up phase—the trend of using a personal credit card exclusively for business expenses to take advantage of the CARD Act should not be undertaken lightly, Testa cautions. For most start-ups, the business owner's personal score determines the interest rates and entrepreneurs should be wary. While protections on the consumer side may allow for some relief you still need to follow the same guidelines to protect your credit score, so avoid late payments and pay off your balance each month. Also, keep in mind that using a consumer card may interfere with supplier discounts and other business card benefits. Lastly, keep in mind that new credit applications account for 10 percent of your credit score, so applying for several cards can negatively affect your score.
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3. Consider Opening a Charge Card
Joel Ohman, a certified financial planner and founder of CreditCardChaser.com suggests that entrepreneurs may be able to avoid high fees by taking out a business charge card rather than a business credit card. Charge cards offer discounts and rebates of 1 percent or more, similar to cash back rewards from a regular business credit card. "The downside is that the charge card cannot be used to carry a balance from one month to the next," Ohman says. "But the cardholder will typically enjoy lower fees while still having a great chance to earn cash back." Additionally, some charge cards extend the billing cycle from a standard 20 to 25 days to 60 days—or sometimes even 90 days—for customers with good credit and with high charge volumes. Bankrate.com's McBride adds that while this approach is a viable option, it's not a risk-free option. Borrowers can quickly find themselves in a default situation if they discover at the end of a billing cycle that they don't have enough to cover the entire balance.
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4. Consider Prepaid Credit Cards
As an alternative to credit, entrepreneurs can also look at products such as the PEX Visa Card, a corporate, prepaid credit card. The 2-year-old service allows business owners to monitor spending and business-related expenses and keep their sales force honest through the use of online tools. "Banks have created, through the credit crisis, this environment where cash is king and in many ways businesses have been forced to revert to using cash, and cash advances to sustain staff spending," says Toffer Grant, CEO and founder of PEX Card. "Everyone is keeping their eye on their bank account." McBride warns small business to look at those small items that can quickly add up: usage fees, reload fees, etc. "For a new business that can't get credit, or for a small business that's trying to avoid borrowing or pay down your debt, then a prepaid card becomes a more favorable option," says McBride. For the PEX Card there is a $50 balance minimum for the primary account and a $7.50 per card, per month fee that covers all transactions, card use, loading and removing funds, reporting, and more. If a business spends more than $50,000 in a month, all card fees are waived.
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5. Consider Peer-to-Peer Lending
Following the credit crunch and Great Recession, banks are still cautious about extending loans to small businesses prompting a growing number of potential borrowers to search for loans online: peer-to-peer lending. Firms such as Prosper and Lending Club offer funding for a variety of purposes and loan amounts vary from several hundred dollars to several thousand. With a social network format, entrepreneurs can plead their case directly to potential investors. The benefits: investors often get a higher rate of return on their investment and the entrepreneur gets a much needed cash infusion. Prosper requires a credit score of 640 or better to post a loan request. Lenders can invest $25 or more each toward your loan. With Lending Club, borrowers pay a one-time origination fee (for 36 or 60 month loans), which ranges from 2 percent to 5 percent of the loan amount, depending on your loan grade (A-G), which is derived from your credit score, loan purpose, employment type, loan amount, loan term, and credit usage and history.
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So shop around, consider your options (both traditional and other), and remember, "Be aggressive!" You are your businesses own best advocate!