I recently found a rate increase notice on page 9 of a 13 page credit card statement from American Express.  Presently, the rate on this particular business card is a very reasonable 12.24%.  On August 1st, the rate increases by nearly 30% to 16.24%.

If I want to opt out of the interest rate increase, I have until August 20th to call in and close my account.  This would allow me to repay my current balance at the lower interest rate.  However, if I want to keep my card open, I must accept a higher interest rate.

Small business credit card holders across the country may get similar, hard to find notices buried deep in their credit card statements.  If I didn’t write about credit cards, I would have tossed that portion of the bill in the garbage.  If I had done so, and I carried a $10,000 balance on the card, the oversight could have cost me $400 in additional interest due to the higher interest rate.

Prior to the implementation of the CARD Act, credit card companies embarked on a massive spree of  rate hikes, leaving some consumers with 29.99% interest rates.  While it is unlikely that credit card companies will get that aggressive with small business credit cards, interest rate increases are always a threat to small business owners.

Companies that don’t revolve monthly balances obviously aren’t going to be hurt by rate increases such as the one American Express imposed on my account.  However, all small businesses that carry credit card debt need to carefully review all 5, 10 or 50 pages that arrive in the mail every month to make sure they don’t accidentally accept substantial interest rate increases that could strain their finances.

-Jeffrey Weber

1.)  Do a 0% Balance Transfer:  If you are currently paying an interest rate of 10% or more, you could save a few hundred dollars a year with a balance transfer credit card.  For example, if you carry a $5000 balance on a credit card with a 13% interest rate, you would could save close to $700 on interest over the course of a year with a 0% APR balance transfer, plus a $300 giftcard from American Express.  This would essentially put another $1000 in your pocket.

However, this option does have some risks.  For example, closing your American Express card could hurt your credit score, especially if this is one of the credit cards you have had the longest.  In some cases, the effect on your credit score might make the difference between getting approved for a 0% balance transfer credit card or not getting approved.

Consequently, if you plan to capitalize on the Amex Ax, apply for a 0% balance transfer credit card before closing your account.  This may also help limit the damage of closing your Amex account, as you will replace some of the credit line you would have lost.

2.)  Use Excess Savings to Pay off Your Debt:  Okay, not too many of us have extra savings lying around, but if you do, you’ll earn a better return on your cash than you might in a savings account.  If, for example, you have a $5,000 balance and opt to close your account, you’ll earn a 6% return on that money, plus save whatever interest expense you might have incurred.

However, as with the balance transfer strategy, the effect closing your credit card account will have on your credit score could be substantial.  Thus, even if you choose to pay off your credit card, you may be able to limit the damage to your credit score by opening a new credit card account.  Plus, this will also provide you with a credit line for emergencies.

3.)  Be Thankful American Express is Kind:  During the past six months, Chase, Bank of America, and many other credit card issuers have been closing consumer accounts and raising interest rates on consumers who choose to keep their accounts open.  Most credit card issuers have been approaching consumers with, “offers they can’t refuse.”  For example, some banks gave consumers this ultimatum:  close your account or pay a 30% higher interest rate.  There were no gift card offers there.

4.)  Prepare for Future Credit Card Turmoil:  Even if you didn’t personally get the Ax from Amex, the $300 gift card bribe highlights the growing struggles of the credit card issuers.  While things will get better, there is little evidence that this will happen anytime soon.  Thus, if you are carrying large balances on high interest credit cards or increasing your monthly debt, be prepared to get an offer from your credit card company.  And don’t be surprised if they are not offering you a $300 gift card.

When the financial markets went haywire last fall, American Express stopped offering fixed APR for life balance transfers and began offering 2.99% balance transfers for 12 months.  This move was a sharp departure from its rivals, most of whom continued (and hopefully with continue to) offer 0% APR balance transfers for 1 year.

For information on current American Express balance transfer offers, please see the appropriate section of this website.

While some cards are offering no fee balance transfers, these cards still carry interest rates in the high teens and, since there are a lot of credit card companies offering 0% APR balance transfers, these are not the best deals.  With 0% balance transfers available, there’s little reason to save a few dollars and then pay hundreds more interest. 

For more information on American Express balance transfers, please see their respective section in the credit card comparison section of this website.  For more information on 0% APR balance transfers, please refer to that section.

During the past four years, American Express offered a fixed APR of 4.99% for life with its Blue and Blue Cash cards, as well as no fee 5.99% fixed APR balance transfers with its Clear card.  Now, consumers will not only be asked to pony up a 3% fee to transfer a balance, they’ll have to pay a hefty APR in the low teens a year later.

The message is pretty clear.  Amex doesn’t want your balance transfers.  Every other major issuer still offers 0% balance transfers, though many have raised fees.  The one bright spot remains Discover, which offers low fees and 0% APRs for a year on both purchases and balance transfers.

One thing American Express does what you do to do is spend, spend, spend.  They are still offering 0% interest rates on purchases for up to 1 year with many of their products.  You can review American Express credit cards in their section of SmartBalanceTransfers.com.  You can also review 0% APR balance transfer offers in that section of SmartBalanceTransfers.com

As always, we’ll keep you posted on any new developments.

Sources:  American Express, Discover