Credit cards can help business owners simplify payment processes and keep track of expenses. Make a mistake, though, and you could find yourself drowning in debt. Credit cards often carry stiff penalties and high interest rates. Plus, they’re crucial to maintaining a good credit score. By avoiding these bad habits, though, you can get the most out of your credit cards without paying steep costs.
Making Late Payments
Your business’s credit card company wants you to make this mistake because it means bigger profits for them. Most companies have hefty penalties for late payments. Late fees vary from card to card, so you should look at your credit card company’s policies to see how much you stand to lose.
With late credit card payments, though, you stand to lose much more than $30 or $50. Paying your credit card on time accounts for about 35 percent of your credit score. Credit companies don’t care how late the payment is. Even when you make the payment an hour after the due time, you can significantly damage your credit score.
The news gets even worse for people making late payments on business credit cards. Companies set interest rates according to how much risk they think your business represents. If you make a late payment, they have a good excuse to increase your interest rate. That’s a long-term setback that could have you paying more money for years.
Making Minimum Payments
Not to be too harsh on credit card companies, but minimum payments are a bit of a scam. If you only make the minimum payment, it could take you decades to pay off your balance. That’s assuming you ever pay it off at all.
The way that minimum payments hurt your business becomes quite obvious when you look at the numbers. Let’s say you have a $2000 balance on an 18 percent interest card. If you make the minimum payment every month (which is usually calculated as the interest rate plus one percent of your balance), then you will have given the credit card company $2,423.22 in interest by the time you have repaid the entire debt. Even more disturbing is that it will take you 182 months (over 15 years) to do this. That’s assuming that you don’t make more purchases with your credit card. If you continue to use the card, then you might remain in debt forever. That’s not an exaggeration.
The bottom line is that you should always pay more than the minimum, even if it really hurts you to do so. The short-term pain that your business experiences is nothing compared to the long-term pain of mounting debt.
Paying Off One Credit Card With Another Credit Card
A lot of credit cards let you pay off previous balances by “transferring” the amount to your new card. That can seem like a lifesaver for someone drowning in credit card debt. This lifesaver, however, has a concrete core that will drag you down.
When you transfer balances, you usually pay a higher interest rate on that amount, which means you owe even more money. You might have gotten one company off your back, but now you have another one demanding payments. What’s the solution? Transfer the balance to a new card, which means paying even more interest. The cycle never ends, and with each step you owe more.
These are three of the worst credit card habits. If you avoid them, you can use business credit responsibly. Fall into these traps, though, and it could mean the end of your business.
[Photo Credit: mariovittone]