Tips for Shopping Interest Rates
Handytips for shopping interest rates because it is likely that small business borrowing costs continue rising in 2019, albeit at a slower pace than in 2018, when the Federal Reserve Board hiked a key interest rate four times.
The last hike came Dec. 19, when the Fed raised the federal funds rate to 2.5 percent from to 2.25 percent, marking the fourth quarter-point rate hike in a row. Within minutes of the news, major commercial banks raised their prime lending rate a quarter point to 5.5 percent, and credit card rates are expected to follow suit.
While commercial banks only offer the prime lending rate to preferred customers with top credit ratings, interest rates of virtually all business loans and credit card debt are pegged to prime rate.
If you pay off your credit card balances every month, which is the smart thing to do, interest rates are less important to you then cashback rewards. But if you need to start building a credit score for a young business or already carry a balance on credit cards, lines of credit or loans, you need to pay attention to interest rates and the fine print that determines how they are calculated.
Credit card companies generally adjust interest rates in the first billing cycle or quarter after a federal funds rate change. That means businesses will begin paying an additional $2.50 a year in interest for every $1,000 in variable rate balances on their credit cards as early as January 2019.
Given that the Fed is forecasting two more rate hikes this year, it behooves businesses carrying large balances to start the year by checking how the interest rate on their credit card and loan balances are calculated, how much they’ve changed and how that and future hikes could impact their expenses in the new year.
Below are some tips for shopping interest rates, including some key terms you’ll encounter as you evaluate how much you are spending on interest, as well as some great online resources you can use to evaluate financing options for your small business.
Effective vs. nominal APR
When it comes to shopping interest rates, always focus on the effective APR (annual percentage rate) rather than the “nominal APR” (the nominal interest rate), which credit card companies are allowed to advertise. The effective APR includes the effects of compounding interest, which virtually all credit cards use, as well as the cost of application, membership renewal and other fees. Congress required credit card companies and loan issuers to disclose effective APR to consumers in Regulation Z of the Truth in Lending Act of 1968 to make it easier for consumers to make apples-to-apples comparisons of their products.
Fixed vs. variable interest rates
Loans are offered on either a fixed- or variable-rate basis. With a fixed-rate loan, the lender guarantees not to change the APR during the life of the loan or credit facility. The interest rate on variable-rate loans, on the other hand, varies in tandem with an underlying benchmark rate, such as the prime lending rate.
While a smattering of small regional banks and credit unions still offer them, fixed-rate credit cards have become virtually extinct following the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), according to Bankrate.com. If you are looking to refinance high-interest-rate credit card debt, your only options may be to roll it over onto a new credit card account with a 12- to 18-month zero percent introductory rate or onto a fixed-rate loan.
Personal vs. small business credit cards
When shopping for credit cards, remember to weigh the pros and cons of small business credit cards. While they provide more robust expense tracking and the ability to manage employee accounts, these cards still hold the account holder personally responsible for the debt should the business fail. It also should be noted that small business and corporate credit cards do not enjoy protections afforded to personal credit card holders under the CARD Act. That means credit card companies can still close or slash the credit limit of small business and corporate accounts without warning, as they did in the wake of the 2008-09 recession.
For comparing small business credit card offers, we recommend Bankrate.com, CreditCards.com and NerdWallet.com. While the sites do alter their listings and rankings based on advertising relationships, they do not allow advertisers to see their product reviews prior to publication.
The biggest advantage of these sites is that they enable users to compare APR, fees, bonus rewards, credit score requirements and other key information in a consistent format across dozens of small business credit cards without having to submit contact information. They also employ editorial staffs that produce a ton of good content to help small businesses evaluate financing options.
Intense competition between traditional banks and online lenders is making shopping interest rates for small business loans easier.
In June 2016, the three largest small business lending platforms began promoting the SMART Box as a voluntary disclosure standard designed to help small businesses understand and assess the costs of term loans, lines of credit and merchant cash advances. The SMART Box presents key pricing information in a uniform fashion and uses plain English to highlight key product features and policies. As of Jan. 1, 2019, 10 online lending platforms in the United States had adopted the SMART Box and seven Canadian lenders had committed to adopting it.