Your small-business credit card can be a valuable tool to help earn rewards for your business, make record-keeping easier, and help your business grow. But you need to use this tool carefully so you do not end up building up big balances that could cost your business a lot of money in interest charges. The following strategies can reduce your interest payments and help you pay off your balances faster:
- Make the highest possible payment you can each month. The faster you pay off your balance,
the less you'll pay in interest charges. Increasing your monthly payments by even a few hundred dollars can help you get
out of debt much faster (see the case study below).
- Find a lender that will give you a lower APR.
- A lower APR translates into lower interest charges as a percentage
of your outstanding balance, so more money from each payment will go
towards paying off your balances and less towards interest charges.
- Switching to a card with a low “teaser” rate can provide you with a very
low rate for a few months, which can help you pay off a big balance and
spend much less in interest charges. But you need to be very careful —
the rate may jump a lot after the introductory period is over. Try to pay
off as much of the balance as possible before the introductory period is over, and mark your calendar to
remind yourself of when the rate is scheduled to change.
BBB Tip: “Teaser” Rates
Watch the calendar carefully, and pay as much of the balance as possible in the first few months.
Most “teaser rates” last only six months, and then the interest rate will jump after the introductory offer expires.
Case Study: How to Pay Less in Interest
Situation — You have a $5,000 credit card balance and your lender requires a minimum monthly payment of 4% of your balance. This translates to a $200 minimum payment in the first month.
Problem — If your card charges 18% interest and you make only the minimum monthly payments, it will take you 11+ years to pay off the balance. By that time, you will have paid the card company more than $2,800 in interest
even if you never make any new charges on the card
making that $5,000 balance actually cost you $8,000.
Solution 1 — Pay more than the minimum each month and pay off your balance faster. Even if you can’t pay a huge chunk of the bill, you can still accelerate the payoff process, which will minimize your out-of-pocket costs from interest charges.
Solution 2 — Transfer your outstanding balance to a card company that will offer you a lower interest rate, and boost your monthly payment a bit. If you switch to a card that gives you a 6% interest rate and increase your monthly payments to $500 each month, you’ll pay off your balance in 11 months and pay only $142 in interest — that’s a whole lot less than the $3,000 interest out-of-pocket described above!
As soon as you stop paying those high interest rates, you’ll free up a lot of money to cover your other expenses!