Credit Card Business Cards

Monday, June 11, 2012 at 9:49pm by Site Administrator

What Happens If I Default on my Business Credit Card?


Business credit cards have become the primary option for unsecured lines of credit, and they can provide several benefits when managed properly. A growing business requires strict accounting. Business credit accounts have higher maximum limits that make it easy to track all your expenses each month in one place. Fees and interest rates are also lower on average than through other credit options, but this will depend on the credit history and score of the business as well as the card.

Once you have obtained a credit account, payments need to be made on time. Missing a payment does not automatically lead to default, which is technically defined as missing payment for longer than one billing cycle, but it will cause a lot of unnecessary trouble. Issuers typically lay out penalty structures in fine print on the credit offer, along with their procedures for declaring default, and it is best to become familiar with these rules before agreeing with your signature.


Penalties Applied Before Default

Actions against a late payment vary greatly between business credit providers. All will begin by attaching a fee of some kind to the late payment. Some will immediately raise your interest rate to the maximum provided in the cardholder agreement. This maximum is higher than the APR range reported on credit offers, which is around 10 to 20%. The penalty interest rate will be in fine print and may be in excess of 30%. It is calculated as a flat percent plus the prime rate. Other lenders may wait until you enter default before raising the interest rate. Whenever it happens, they are allowed by law to maintain this high interest rate even after you are back on good terms. They are not required to issue notice of fees or rate changes.

If you anticipate a later payment, it is best to contact the creditor immediately and discuss your situation. They may be willing to waive penalties in exchange for knowing the check is in the mail. Even if you are unable to make payment and are anticipating default, immediate contact is the best course of action. It may be possible to negotiate a forbearance or lower the minimum payment. Their one goal, to secure a prompt payment from you, is more important to a reputable creditor than imposing penalties.


Entering Default

Once your account enters default at 60 days of non-payment, or 90 days depending on the agreement terms, the creditor begins with phone calls and mail inquiries. At the same time, they will report the delinquent account to the business credit bureau and apply additional default penalties to the account. This usually consists of more fees, and the more lenient lenders will now impose the excessive and indefinite default rate.

It is very important to not let stress lead to avoidance of contact with the creditor. Their goal is still the same, and a lack of communication will simply push them to further extremes. They cannot have you arrested for entering default, and they cannot harass you with phone calls at your place of business without your permission. They can sue you for non-payment, but this is costly and unlikely to happen without a high enough balance to justify the action. After 90 days of default, and absent communication or ability to pay, they will likely send your account to a collection agency. Agencies are more likely to seek civil judgment for smaller balances.


Credit Damage

Payment history comprises 35% of the FICO score most commonly used by business lenders. A non-payment will cause a temporary drop in the score, and a record of the incident will stay on the history for seven years. If this is followed with on-time payments, recovery will be quick. Default, on the other hand, is considered on par with bankruptcy in that it will result in lasting damage to the credit score and stay on your history for 10 years. Other creditors may respond to changes in your credit score by closing accounts or increasing the APR.


Unsecured Versus Non-recourse

Most unsecured credit is backed by the personal guarantee of everyone with stake in the business. If the debt upon default is great enough, lenders will go after the assets of the business first and then all guarantors to achieve repayment. Some credit cards are non-recourse, which means they were obtained based on the business score alone. These cards generally have lower maximum limits and less favorable terms. Creditors can only pursue business assets with non-recourse cards.

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