I recently attended an SBDC Small Business seminar and was surprised to discover how many small businesses were financing their businesses via credit cards. I understand the difficulty of securing money for start-ups and the passion of pursuing one’s dream to have their own business move them to the desperate act of securing high multiple credit cards to get started. I don’t understand this tactic unless you have cash flow to pay off the card balances. If you don’t, you will severely damage your credit ratings. Be that as it may, if you are going this route, be aware of the high charges awaiting you if you are late in paying your bills.
Here is an example I recently experienced with a major credit card company with actual numbers.
I was looking over an $881 monthly charge of my wife’s card before paying it and noticed an interest charge of $59.39 and a late fee of $39.00. (The card companies will argue that the late fee is not related to the interest charge, and I will advocate they are kissing cousins as both are triggered by the one act of receiving the payment late. It seems obvious that the card company uses this tactic to show a lower interest rate.)
Moving on to the math using their interest charge of $59.39, this is an interest of 6.73%. This doesn’t sound too bad until you realize (which they hope you don’t) this is for one day only. Amortized it comes out to 2,456%, an astounding number. I thought this was against the usury laws, but I was to learn it is not. In fact, new credit card laws that go into effect this August change some credit card practices, but they do not limit how high interest rates can go. I asked my wife to call the card company and ask how late the payment was. She was told one day, which in effect, was the full 2,456% rate. If we add the $39.00 late fee, the annualized charge is 4,072%. After I did this math, I asked her to call again and tell them this charge for one day late was unfair, and they did not hesitate to immediately tell her they would void both charges. I have always found if you phone and politely voice your unhappiness over their outrageous charges, they will yield and adjust or eliminate them. Of course, if you are very late on a consistent basis, the outcome may be different.
Knowing that card companies generated $20.5 billion in fees in 2009 and that few people challenge them, they would rather void some charges so as not to shine the spotlight on this lucrative source of income.
There are some other variables in this transaction in that you are at the mercy of the card company in knowing about how long did it take for the mail to get to them. One day, seven days? Also, how long did it take for them to process and enter the payment on their books?
A small piece of good news is that the new law states credit card companies must give consumers at least 21 days instead of the current 14 to pay their monthly credit card bills.
So, make the call, endure the phone wait, and challenge the charge. Every bit helps when you are fighting for survival and profits.
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