I may have missed the boat, what's up with credit card interest policies?
January 26, 2012 2:35 PM   Subscribe

Are there any credit cards out there that still charge interest on the outstanding balance rather than the total balance?

I have 2 credit cards, one personal, the other for my business that I own. Both with the exact same interest rate. I happened to charge the same amounts on the two cards at the same time and saw the resulting interest. I later paid an amount that was above the minimum, but lower than the outstanding balance (the payment was the same amount to both cards) and the interest charges came out totally different!

After a bit of research, I found out that my personal card charges interest on the outstanding balance, where the business card charges interest on the total balance at the time the interest is assessed. Then there's also a statement on the business card that roughly says as long as there's a charge on the card, regardless of if I paid the previous month's outstanding balance in full, they will keep charging interest until the account reaches zero. My previous understanding was that as long as the outstanding balance was paid, no further interest would be assessed.

So I got into a catch 22 with the bank. Here's a rough timeline to illustrate:

Month 1 - Purchases.
Month 2 - Pay partial. Purchase more.
Month 3 - Notice high interest on biz card. Pay full outstanding balance. Purchase more.
Month 4 - More high interest on one card & flag problem in head. Pay outstanding balances again. Keep purchasing for business stuff.
Month 5,6... - Cycle continues, more high interest on biz card, WTF? APR not adding up. Later find policy change in original contract and immediately change payment procedures to pay balance to zero.

I should note that the personal account is through a credit union and the business account is through a bank. Does this make a difference?

Looking for a new business credit card, I asked a different bank about this. According to this bank's representative this change swept through the credit card industry a few years ago and I was probably grandfathered in on the personal card and being the good business customer I never noticed until I got into that situation expecting something different. Read the contract dummy... ;)

So, are there any cards out there that calculate interest with the "outstanding balance" methodology or have they all changed to the "total balance" method now because it makes them more money?

I've heard Chase and AmEx business cards are good via a couple online reviews, but I've never had a card with a yearly membership fee and I don't really care about rewards because it seems that the industry is raising rates on vendors that accept the cards in order to pay for the rewards, which from my perspective is vendors just pass that through back onto me anyway by raising prices. I'm paying my own rewards! That's no reward! And I'm sure credit card companies take from those too, gradually eating away at our economy and our pocket books.

For now my personal card remains grandfathered into the old system but who knows how long that will last.

What's the community opinion on Chase and AmEx? I read a few reviews that say these are good cards to have for business, but they seem the same as the rest to me, the reviews only touched on great customer service, but if the underlying policies are the same, they're no different from the rest financially speaking.

I only bring this up because as my business grows (we just turned 3 years last week so we're still small potatoes and this situation was also small and easily dealt with), but I think these types of changes in interest policy would have much larger dollar amount impact on a large corporation which we might like to be someday. How do you deal with this or do larger corporations get extra perks from sheer volume of usage?

Am I dreaming of an interest policy long past that will never return? How does your business handle credit - use more often or sparingly? Did you notice the change in interest calculation policies and were you grandfathered in or not? How do you feel about rewards from a business standpoint?
posted by anonymous to Work & Money (4 answers total)
Businesses should use credit cards for current expenses only, and pay them off every month, using more traditional financing for longer-term credit needs. Therefore customer service and rewards are far more important than interest rate or methods of calculating interest to a business card customer. Hence the recommendations for AmEx, and I suppose Chase is trying to give them a run for their money.

Sounds like they basically did away with the grace period for new charges when carrying a balance. I haven't noticed that happening on any of my cards, but then I usually carry no balance or else use a promo rate.
posted by kindall at 3:10 PM on January 26, 2012 [1 favorite]

Mr. Lamaitre: It's not twisted logic, it's just logic that isn't totally self-interest-focused. It's true that retail costs go up for everyone, regardless of card choice. However, there's no answer to the development of this "revenue stream" of the credit card companies, and obfuscation of real costs, unless people think broadly.

Sorry if this is a derail; I'm agreeing with the OP.
posted by amtho at 4:30 PM on January 26, 2012

Why are you leaving a balance on your business card at all? That's the problem, right there. You should go to your credit union or a local commercial bank and get a line of credit. The rate will almost certainly be lower than any CC interest rate, and then the policy doesn't matter. Depending on what sort of work you're in, you might need to go to a couple of banks/CUs to find one where they understand how things work well enough to give you good credit terms.

It's going to be tough to find reviews about business credit cards that touch very much on the intricacies of their interest computations, because most businesses don't use them that way. In fact, a lot of businesses' AmEx cards are purely charge cards, not credit cards at all. (I.e., you can't carry a balance on them; when the bill comes at the end of the month, it's like the power bill or the rent or anything else, you pay the amount due or it goes to collections.) The selling points of the cards are generally on the backend billing / reporting systems, or that they'll push data into expense-tracking software or a general ledger system easily.

Typically, business LoCs are "prime plus" -- they're based on a prime interest rate plus some amount. The "plus" amount depends on how much you're borrowing and how much of a risk you're perceived to be. Generally the amounts start at around $25k, but you don't actually have to pull out that much; it's a line of credit rather than a loan, and you should only have to pay interest on what you actually use. It's definitely something you want to shop around for, and as your business matures and has more of a track record you'll want to renegotiate it on better and better terms.
posted by Kadin2048 at 7:03 PM on January 26, 2012 [2 favorites]

Please also note that the CARD Act of 2009 applies consumer protections to individual consumer cards that business cardholders do not have. For example, if you carry a multiple balances and multiple interest rates on a personal card and pay $50 over your minimum payment, the lender must now apply the $50 to your balance with the highest interest rate. However, your payments on a business card do not work that way -- all payments over and above your minimum payment are generally applied to your balance with the lowest interest rate (though it's at each lender's discretion).
posted by The Wrong Kind of Cheese at 9:53 PM on January 26, 2012

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