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In addition to the financing methods highlighted in Section 3, those seeking to start and fund a business can look to credit cards as an alternative option. A credit card is a great financial tool. It can be more convenient to use and carry than cash, and it offers valuable consumer protections under federal law. At the same time, it’s a big responsibility. If you don’t use it carefully, you may owe more than you can repay, damage your credit rating, and create credit problems for yourself and your business that can be difficult to fix.
Here is some important information that may help you determine whether you’re ready for credit financing, what to look for when you select a company to do business with, and how to use your credit card responsibly.
To establish credit, consider applying for a secured credit card. It requires that you open and maintain a bank account or other asset account at a financial institution as security for your line of credit. Your credit line will be a percentage of your deposit, typically from 50 to 100 percent. Application and processing fees are not uncommon for secured credit cards. In addition, secured credit cards usually carry higher interest rates than traditional non-secured cards
Fees, charges, and benefits vary among credit card issuers. When you’re choosing a credit card, shop around. Compare these important features:
The APR is a measure of the cost of credit, expressed as a yearly interest rate. Check out the “periodic rate,” too. That’s the rate the issuer applies to your outstanding balance to figure the finance charge for each billing period. If the card offers a very low introductory rate, find out what the rate will be after the initial period. Ask about other limitations on the initial rate. For example, is it only for balance transfers, and not regular purchases? Be aware that some companies have high penalty rates. For example, if you’re late paying your bill, your rate may increase significantly. Ask when the company may apply a penalty rate to your account.
This is the time between the date of a purchase and the date interest starts being charged on that purchase. If your card has a standard grace period, you have an opportunity to avoid finance charges by paying your current balance in full. Some issuers allow a grace period for new purchases even if you don’t pay your balance in full every month. If there is no grace period, the issuer imposes a finance charge from the date you use your card, or from the date each transaction is posted to your account
Many credit card issuers charge an annual fee for granting you credit.
Some issuers charge a fee if you use the card to get a cash advance, if you fail to make a payment on time, or if you exceed your credit limit. Some may charge a flat fee every month whether you use the card or not.
Many issuers have 24-hour toll-free numbers and hotlines. In addition, they may offer other benefits, such as insurance, credit card protection, discounts, rebates, and special merchandise offers
While a credit card makes it easy to buy something now and pay for it later, you can lose track of how much you’ve spent by the time the bill arrives if you accounting is not precise. Moreover, if you do not pay your bill in full, you will have to pay finance charges on the unpaid balance. Additionally, if you continue to demand credit while carrying an outstanding balance, the existing debt can snowball. Failure to repay debt will tarnish your credit report, which will then incur a heavy impact upon your business. Three different account agreement types exist to choose from:
In a revolving agreement, the account owner pays in full each month or chooses to make a partial payment based on the outstanding balance. Banks typically issue credit cards based on a revolving credit plan.
In a charge agreement, the account owner promises to pay the full balance each month, so that there are no interest charges. Charge cards and charge accounts with local businesses often require repayment on this basis.
A consumer signs a contract to repay a fixed amount of credit in equal payments over a specific period of time. Automobiles, furniture, and major appliances often are financed this way. Personal loans usually are paid back in installments, too.
For more information about credit financing visit these sites:
Entrepreneur. COM – The ABC’s of Business Credit: www.entrepreneur.com/money/paymentsandcollections/article76886.html
The Federal Trade Commission:www.ftc.gov
The information on this site is not intended to constitute legal advice or to substitute for obtaining legal advice from an attorney licensed in your state. This web site is not intended to be advertising under applicable laws and ethical rules. These materials have been prepared by the French American Chamber of Commerce with the expertise of our staff and members for informational purposes only and are not legal advice. Anyone viewing the information should not act upon it without seeking professional counsel. The information contained in this website is provided only as general information which may or may not reflect the most current legal developments.