Using your credit card to provide working capital for your business is not recommended. High interest rates can make it massively expensive if you don’t settle outstanding balances at the end of each month.
But this doesn’t stop many entrepreneurs and business owners turning to their credit cards when they need cash quickly. There’s good news for people in this situation, as the UK Cards Association have just brought in a series of changes to help credit card holders have more control over their card accounts.
Changes that will help credit card holders reduce their costs
From early in 2011 the most expensive debt on your credit card will be paid off first. This means that for the 39% of people who don’t clear their card balance in full each month, any repayment of capital will be taken from the debt that’s attracting the highest level of interest.
The UK Cards Association believes that around a quarter of all card holders will benefit from this change.
In addition, from March this year all new cards will have a minimum repayment that includes an element of capital. The minimum payment will be calculated to cover interest, fees and 1% of the balance outstanding on the card.
Other changes that could help reduce the cost of credit card debt
Until now business owners needing to boost their cash flow may have been tempted to use the blank cheques sometimes sent out by credit card companies. This temptation is now being removed as the card firms won’t be putting unsolicited cheques in the post from now on.
All these changes to the way in which credit cards are operated are being introduced voluntarily, and they include a commitment to improved communication with card holders. An example of this is when a card company offers to increase a credit limit they’ll make contact with the cardholder twice to tell them. The card holder will also find it much easier to reject the rise.
Credit card companies want the UK’s 30 million card users to manage their accounts responsibly and to avoid building up excessive debt.
Entrepreneurs and business owners will still be able to use credit cards as a short term solution to cash flow issues. But they would be wise to seek alternatives to credit card debt, such as invoice finance, as soon as possible.