When you have to carry a balance on your small business credit card, the interest charges can be expensive. You can shop around for the lowest rates, but then your new card’s interest rate can still increase. What the heck is going on?
How Credit Card Interest Rates Work
Ten years ago, credit card issuers were able to advertise cards with “fixed” interest rates, and then increase the rates at their whim. But after the CARD Act of 2009, credit card issuers were no longer allowed to arbitrarily raise your interest rates, and they couldn’t describe their rates as fixed if they could be changed for any reason.
Today, nearly all credit cards are offered with so-called variable interest rates that are tied to the Prime Rate. This means that your credit card’s interest rate will likely rise when the the Prime Rate increases, and fall when it decreases.
What’s the Prime Rate?
The Prime Rate is the interest rate that commercial banks charge their customers with the highest creditworthiness. However, this rate is not really determined by the banks, it’s ultimately determined by the federal funds rate, which is the overnight rate that large banks can use to lend money to each other. The federal funds rate is set by the members of the Federal Open Market Committee, which normally meets eight times a year.
Most of the time, the Federal Open Market Committee doesn’t make changes to the federal funds rate, and there was recently a period of seven years where it remained unchanged at a historical low for seven years. From December of 2008 to December of 2015, the Prime Rate held steady at 3.25%. Yet since then, it has been raised by a quarter of a point five times, including three times in 2017 alone. The Prime Rate is now at 4.50%, which means that a credit card account you opened before December of 2015 will now have an interest rate that’s 1.75% higher than it originally had.
And there’s no guarantee that the rates won’t increase some more. From 1978 to 1985, the Prime Rate was over 10%, and it briefly reached a height of 20% in April of 1980 as the Federal Reserve Bank sought to control inflation.
What Can You Do?
First, you should always try to avoid all interest charges by paying your monthly statement balances in full. But many small businesses will still need to carry a balance on their credit cards, so your next priority should be to minimize your interest costs. First, try to find the small business credit card with the lowest possible standard interest rate. To find the best possible interest rate, you’ll likely have to forgo earning rewards, but the savings on interest charges will likely be more valuable.
Another way to save money on interest charges is to simply ask for a lower rate. Most small business credit cards are offered with a range of standard interest rates, and the rate you receive will be based on your creditworthiness when you applied for the card. If you’ve improved your credit score since your account was opened, then you may qualify for a lower standard interest rate. But don’t expect the card issuers to automatically lower your standard interest rate on their own. You have to take the initiative to call the card issuers and ask for a lower rate.
Finally, you can also save money on interest charges is to apply for a small business credit card with 0% introductory financing on new purchases, balance transfers or both. This allows you to avoid interest charges for a limited time period, although nearly all 0% APR balance transfer offers require you to pay a balance transfer fee of between 3% and 5%.
As the Prime Rate rises, the interest rates on your small business credit cards will rise as well. This is an inherent risk you take when you receive any kind of loan that has a variable interest rate, not just a credit card. But by taking all of the available measures to reduce your card’s APR, you can continue to finance your small business purchases while paying the least possible amount of interest.
This article was originally written on January 30, 2018 and updated on January 20, 2021.