What Is a Personal Credit Card?
A personal credit card can be used as an alternative to cash or checks for small purchases.
Personal credit cards are designed specifically with the individual consumer in mind and usually have a less stringent approval process than business credit cards. This makes obtaining one easier and they generally charge lower fees and rates than business credit cards.
What are the benefits of a personal credit card as opposed to cash or checks? Personal credit cards offer convenience and security by not requiring money up front. It allows for small purchases to be made securely without the risks associated with carrying large amounts of cash.
Here are four often overlooked ways a personal credit card can get you out of financial trouble.
Get an Extension of Credit (Cash Flow)
Technically, the term “extension of credit” is used to describe borrowing money by taking out a loan.
When it comes to using a credit card, however, this phrase is appropriate as well since you’re allowed to borrow money against future earnings – for example, when you pay with your debit or credit card and wait until the next month to pay the amount of money you owe.
A personal credit card can easily extend lines of credit to small businesses such as yours. Because of their lower approval requirements, business owners can more easily obtain personal credit cards as a method for extending lines of credit.
Access to Fraud Protection
Personal credit card companies offer minimal reimbursement to consumers if their cards are lost or stolen. Similarly, there is usually very little recourse for fraudulent transactions via direct debit or a card linked to a debit card. To take advantage of fraud protection, business owners should ensure they select a personal credit card that offers up to $100,000 in liability protection in the case of a lost or stolen card.
Consolidate other Debts with a Balance Transfer
Business owners that carry a large balance on an existing credit card can benefit from transferring their balance over to a lower interest rate personal credit card. Monthly payments will be smaller and money that would have been used for paying interest can go towards other expenses.
A balance transfer can save you money, but make sure you do it right. Do not use the credit card to buy more things until you pay off the balance. Also, if your bank offers an incentive for transferring a balance (i.e., 0% interest for 12 months), make sure that there is no fine print or hoops to jump through — just interest-free time to pay off the balance.
But before you sign up and transfer your balance, here are some things to consider.
- What you’ll pay: If you’re not approved for the 0% APR, your interest rate may be 20-25%, which is significantly higher than average rates. As with any credit card debt, if you only pay the minimum each month, it will take you years to fully pay off your existing balance, and you’ll wind up paying a lot more in interest. And, of course, if you miss a payment or can’t pay it off after the 0% period expires, your rate will skyrocket to nearly 30% or higher — an enormous difference that could cost hundreds of dollars each year.
- How much time is left: If you have six months left on your 0% APR deal, it may be worth just paying the minimum until the period expires. However, if you have a year or more remaining, you can use that time to pay off your balance in full while saving money on interest.
- What the balance transfer will cost: Some banks offer free transfers during promotional periods but charge a fee (usually 3% or 4%) for processing after that. Check the fine print on any 0% APR offer and make sure there aren’t any extra fees. If you can’t pay off your balance in full by the end of the introductory period, you may want to skip a transfer and just get a low-interest card from another issuer.
- What your alternate card will cost: After you transfer a balance, make sure the new card doesn’t have an annual fee. If it does, it could cancel out any savings from transferring your balance and then some. Also check to see if the issuer charges interest on purchases while you’re still paying off the transferred balance (some do). If so, you could end up with an interest rate much higher than the one you’re transferring from.
- How much your monthly payments will be: You may not realize that you’ll need to pay more because of the balance transfer. Once you’ve transferred your balance, make sure to pay at least two to three times more than before (to account for the interest accrued while you were paying the minimum on your old card). That’s a good practice in general, but especially when you have a large transfer.
- What your credit score will be: A balance transfer can wreak havoc on your credit score in a short period of time. Be aware that it takes about six months for any significant damage to ease off. If your credit score is important to you, make sure you pay your new card on time every month and leave the balance on your old card while waiting for the transfer to process. And if you want to know what your credit score is, use a free service such as Clearscore.
- What will happen if you don’t have enough money: It may not be difficult to track how much you owe each month when the balance is on one card, but two or more cards makes it complicated. It only takes one late payment to damage your credit score, and that could make it difficult to get new loans at the best rates in the future. If you move your balance without planning accordingly, you might end up missing payments and ruining your credit score.
- What will happen if you do pay off the balance early: If you have the money to pay off your balance before the promotional period ends, it’s almost always worth doing that. You’ll save yourself all the interest that would have accrued, and you can get a new card with a lower rate or no annual fee.
- What will happen if you’re not approved for two cards: It’s not a good idea to take out a cash advance or transfer your balance to two cards if you’re denied the second one. It’s just another way of transferring, and it could add more to what you owe than you intend to borrow.
Earn Reward Points and Save Money on Things You Will Need to Buy Anyway
Personal credit cards often offer rewards, such as cash-back or travel points, which can help to reduce the cost of business expenses.
What Are the Disadvantages or Risks Associated with a Personal Credit Card?
It is important for business managers to note that personal credit cards offer fewer consumer protections than business credit cards, such as charge-backs and extended warranties. In addition, because personal credit cards have a lower approval requirement they also have a higher rate of default. Therefore, personal credit cards are less secure than business credit cards.
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