Before getting a business credit card, a business owner should do his or her homework. There are plenty of things out there that are good impulse buys (magazines, chocolates, and small things) but a business credit card is not something that should be decided upon by feel. A credit card requires a commitment, and in the same way you wouldn’t marry someone simply because they told you how great they were, you shouldn’t get a credit card simply on first impressions.
A good starting point for your research into business credit cards is with the terminology. Getting a solid grounding in what all those words and abbreviations mean will help you to much more easily get through all the ‘legal-ese’ in the details. Here’s a quick run-down of some terms you should understand before you get too far.
APR – APR stands for annual percentage rate. You will see this expressed as number, likely with a few decimal places behind it, followed by the percent sign (%). This is the amount of interest you have to pay on any balance that you carry forward on the card. You will likely find that rates will fall between 13% and 25% on most cards.
Usually, there are a few different APR’s on each business credit card. There is one APR that is applied to the money you spend in a typical transaction, another one for payments that are made late, and another one for other features of the card such as cash advances.
You can avoid having to pay any of this APR if you can manage to pay your bill in full at the end of every month. Since APR usually only accrues on balances carried forward, a person who is organized and responsible with their money can sometimes manage to use a credit card and never pay a cent in interest. If this is something you can afford to do with your business credit card, it is an excellent idea.
Prime Rate – The prime rate is the number used by all American lending agencies as a base for the APR on business credit cards. Set by the American government, the prime rate changes every month, and with it, some business credit card interest rates change. If a card has a variable interest rate, that means that you will be accruing interest at a different rate from month to month. Usually the rate will be determined by taking the previous month’s published prime rate and adding an additional percentage.
Minimum Finance Charge – This is the smallest payment that you can make on a credit card from month to month. Usually it is a percent of the total amount of your business credit card balance. It is a good idea to always pay more than the minimum finance charge on a credit card bill. Doing this will help you to pay off the bill faster, and thus save you money in the long term.
Annual Fee – Many credit cards offer substantial benefit packages to their cardholders. Some of the most comprehensive benefit packages come with business credit cards that carry an annual fee. The annual fee helps the credit card company to defray the cost of the benefit package. Essentially, the annual fee is exactly what it sounds like. It’s an additional charge that a cardholder must pay every year in order to continue to use the card.
Oftentimes a credit card company will offer a business credit card with no annual fee for the first year. Other times there will be a higher annual fee for the first year that then decreases (or goes away completely) after that first year.
Other Fees – There are usually other fees that apply to using a business credit card. If you use it to get a cash advance for your business, there is usually either a flat fee imposed on the cardholder, or a percentage of the advance. Sometimes these fees show up as separate APR’s (discussed earlier) that can be substantially higher than the overall APR of the card.
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