Businesses today have a wide range of financing options.
You can secure funds from an investor, get a bank loan, or tap into an overdraft, just to name a few common routes.
Business credit cards are another popular option, but their biggest drawback — high interest rates — is something to pay close attention to.
That’s why we’ve created this entire article on the subject of credit card interest rates.
We’ll dive deep into what credit card interest rates are and how they work, the different types of interest your bank might charge you, and how credit card interest can impact cash flow and financial management.
What are credit card interest rates?
Credit card interest rates are the cost of borrowing money on your credit card. It's how banks make money by offering credit cards. They give you access to funds (your credit card limit) that allow you to make purchases. In exchange, you have to pay that amount back plus interest.
Credit card interest rates are typically expressed as an annual percentage rate (APR). However, interest itself is charged more often — most commonly monthly or even daily.
We’ll get into the details of how interest is charged in a second.
If you don’t want to dive into the technical details, just know that APR is an expression of how much interest you’ll pay for carrying that balance over the course of a year. So, for example, if you carry a $10,000 credit card balance for a year at an APR of 25%, you’ll pay $2,500 in interest charges.
How credit card interest rates are calculated
Credit card interest rates are calculated using that card's APR (annual percentage rate), divided by the period of time over which interest is calculated.
Let’s say, for example, you have a card with a 20% APR that charges interest daily. Your daily interest rate would be 20% / 365 = 0.0548%.
If your credit card balance on a given day is, say, $4,500, then your interest charged would be:
However, banks don’t typically add interest charges on a daily basis. Instead, they usually calculate your daily balance for each day over the course of the previous month and then apply that interest charge to your account at the end of the month.
For example, let's say that in June, you carried a $4,500 balance from June 1 to June 10. On June 11, you paid off $2,000 of that balance, carrying a $2,500 balance from June 11 to June 20. Then, on June 21, you made a $1,200 purchase and carried that $3,700 balance through the end of the month.
The bank would calculate your interest (assuming an APR of 20%) as:
- $4,500 x 0.0548% x 10 days = $24.66
- $2,500 x 0.0548% x 10 days = $13.70
- $3,700 x 0.0548% x 10 days = $20.27
So, your total interest charge for the month of June added to your balance on July 1, would be:
That’s how interest rates for standard purchases are calculated. However, many business credit cards charge different rates for different kinds of balances.
Let’s explore.
Different types of credit card interest rates
Purchase rate
The purchase rate is the standard rate applied to any purchases made on the credit card.
Most business credit cards provide an interest-free timeframe (such as 55 days). If you pay back that purchase before the number of days stipulated, you won’t be charged interest.
Balance transfer rate
The balance transfer rate applies to any balances brought over from another credit card.
Banks often offer low balance transfer rates (even as low as 0%) as an introductory offer. You can take advantage of these offers to bring over a high-interest balance from one bank and not receive interest charges for a period of time (typically 6-12 months).
Cash advance rate
The cash advance rate is charged when you take cash out at an ATM or bank teller.
It’s usually best to avoid doing this, as cash advance rates tend to be higher than the standard purchase rates and begin accruing interest immediately, with no grace period for early payment.
Money transfer rate
This is essentially the same as a balance transfer, except you’re transferring the balance from an overdraft to your credit card rather than between credit cards.
Introductory rate
An introductory rate is a promotional offer. Banks provide a lower purchase interest rate for a limited period of time on new cards.
These rates can apply to purchases, balance transfers, or both.
After the introductory period has expired, balances revert back to standard interest rate charges.
Penalty rate
Some financial institutions charge a higher interest rate if you miss payments or exceed your credit limit.
This is known as the penalty rate, and it’s something you want to avoid.
Fixed vs. variable APRs
All of the types of credit card interest discussed above are fixed rates (aka fixed APRs). The bank tells you, “Cash advances are charged at an APR of 32%,” and that will always be the case until such a time that the terms of your credit card agreement change.
Some institutions offer credit cards with variable APRs, that is, an interest rate that fluctuates based on some form of index or economic benchmark, like the prime rate.
Variable APRs can be beneficial if lending rates are falling, as your credit card interest rate will be tied to that index and will fall in line. The opposite is true as well, however. If lending rates go up, so too will the interest you pay on your card.
How credit card interest rates impact business finances
Credit card interest has an obvious financial impact: it’s an additional cost.
For that reason, it's a best practice to avoid carrying credit card balances and to pay off any amounts within the grace period to avoid interest charges.
However, the use of credit cards to fund business purchases has a few other important consequences.
High credit card interest rates increase the cost of borrowing, reducing your available cash for other operational needs. This can strain cash flow, especially for small businesses on tight budgets.
Moreover, fluctuating interest rates (such as in the case of a card with a variable APR) or unexpected high-interest charges can impact your ability to budget and plan effectively.
If you’re carrying high credit card values, you may need to put more of a focus on repaying high-interest debt, potentially taking on other debt, such as a bank loan, to repay it. This leads to a cycle of increasing debt and reduced overall financial stability.
Managing and minimizing credit card interest rates
Avoiding using credit cards altogether might be useful advice on the personal front, but it's kind of avoidable in the business context.
There are, however, a number of ways that businesses can avoid and minimize credit card interest.
Here are a few practical strategies to take note of to save money.
Always pay your balance in full
Just like with a personal credit card, paying off your balance in full at the end of each statement period is the best way to avoid paying credit card interest and reduce your operational expenses.
At the very least, make sure you meet your minimum payments to avoid late payment fees.
Use your payment history to negotiate more favorable rates
Businesses with a strong history of healthy card utilization and on-time payments can use this to negotiate lower interest rates with their bank.
Of course, you’ll need to have and use the card first, but this is a good practice to pocket for later once you’ve built up some goodwill with your bank.
Leverage balance transfers where need
If you do get into strife and end up carrying a credit card balance for a long period of time, you might want to think about getting a balance transfer card.
With a balance transfer, you can move the amount you owe from an interest-bearing card to one with a lower interest rate and/or interest-free period.
You’ll generally need to get this from a different bank than you’re already doing business with, however, so it can be a bit of a logistical problem.
For that reason, balance transfers should be seen as an emergency option for reducing interest charges. Paying your card balance in full each month should be the best practice.
Avoid cash advances altogether
Using your business credit card to withdraw cash from an ATM or a merchant is a bad idea.
Cards almost always charge extremely high interest rates for this, which are typically charged immediately, with no grace period for early payment.
Save cash withdrawals for your debit card.
Monitor credit card spending in a centralized expense management solution
Keeping on top of credit card spending — monitoring trends like when and where given departments are using company credit cards — is critical for maximizing spend visibility.
Expense management solutions like BILL Spend & Expense can help you automate reporting and serve as a centralized dashboard for monitoring spending behavior.
Compare different offers in detail
While most business credit cards operate in a similar way, the offers that banks advertise can differ significantly.
Before signing up for a given card, make sure to compare the offers in detail, including:
- Different interest rates charged
- Balance transfer offers
- Any rewards or benefits available
- Fee structures (like annual card fees)
- Credit limits and utilization options
- Terms and conditions like introductory rates, penalty rates, and grace periods
Pay careful attention to fees and interest rates. One card might offer a much lower purchase rate compared to a second, but come with a high annual fee that actually makes it a worse choice for your specific needs.
Keeping credit card interest rates low
If you’re using a credit card, whether as your primary purchase card or as an emergency option, you’re going to need to be on top of the interest rates your bank charges you.
Paying off your balance in full is the best way to avoid paying interest altogether. To achieve that, you’ll need a strong understanding of spending trends extracted from a centralized spend management software platform.
These powerful solutions can help you access business credit, track spending, develop accurate forecasts, create virtual cards, manage reimbursements, and more.
