Credit cards can be a convenient way for businesses to cover everyday expenses and protect their spending power during periods of uncertain cash flow. But for a small business with a limited amount of money and resources, it’s important to take the time to fully understand the cost of carrying a credit card balance from month to month. Even if you have a low-interest business credit card, you can’t ignore the costs of mounting credit card debt or the effect it has on your bottom line.
Keep reading to learn more about what you should think about before you carry a balance.
How much is your APR?
First, check the interest rate before you sign on the dotted line. For a credit card, this number will likely be shown as the annual percentage rate (APR). The APR is the total cost of borrowing money every year, including interest and potentially some fees. Most Canadian credit cards feature an APR of about 20%.[1] Credit card interest typically accrues daily, so you can estimate your daily interest rate by dividing your APR by 365.
If you’re only paying the minimum or making a partial payment on your credit card each month, having a high APR could make a big difference in what you owe. You’ll be charged interest on any unpaid portion that rolls over to the next billing cycle, and if you carry your balance again, you’ll owe interest on the interest you’ve already been charged.
You can avoid interest by paying off your statement balance in full before the end of the grace period, which is at least 21 days after your billing cycle closes.
If you’re weighing your credit card options, CIBC has experience helping small businesses in Canada choose the right business credit card solution. CIBC also provides customers with online management tools to help you better track your money and stay on budget as you build your business.
How much are the fees?
You could run into a range of fees whenever you borrow money, from origination fees when you take out a loan to annual fees on a credit card. Not all fees will be included in the APR calculation. If you aren’t able to make your payments on time, for example, you may be charged a separate late payment fee.
While some fees are smaller than others, they all add up and impact how much you owe over time.
How are you going to pay off your balance?
Before you open a credit card account, it’s a good idea to map out how you’ll pay off your balance each month so that it doesn’t grow. If you’re only paying the minimum amount due on your credit card, it could take years to pay it back. Look at your cash flow and be honest with yourself about how much you can afford to take on in payments every month.
Carefully consider the full cost
It’s easy to overlook the additional cost of carrying a balance. But carrying a balance from month to month can have a far greater impact than simply costing you more money—it could also affect how your business is able to change, expand and grow. Outstanding credit card debt, and the interest it accrues, could compromise your solvency if it gets out of control.
Carrying a balance isn’t always a bad choice. It can buy you time to pay for things you need to help your business grow. But just as with your personal credit card, it’s important to use your business credit card thoughtfully and responsibly to keep your company’s finances healthy.
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