Credit card debt is like quicksand

Credit card debt is a funny thing. It’s brutal and can quickly overwhelm your business with its 15%+ interest rates. But, it’s frequently glamorized by entrepreneurs. Many entrepreneur influencers suggest funding your early-stage business with credit card debt or living off credit cards while you wait for your business to turn a profit. I’ve even heard someone say “you aren’t a real entrepreneur until you’ve made payroll with your credit card.” 🙄🙄🙄

But, credit card debt is unlike other major types of small business debt. It’s easy to get into (just swipe your card!) and its oppressive interest rates make it near impossible to get out of. I’ve seen business owners paying so much in credit card interest that they’ve could’ve better spent on additional employees, equipment, or paying yours truly to manage their accounting.

This past week, a regular reader (aka a friend of the list aka a subscriber) reached out and asked for help with their credit card debt. They’d fallen onto a bit of a hard time because of the COVID pandemic and racked up some credit card debt. Thankfully, their business is doing better and, now that it’s bouncing back, they want to wipe out their debt.

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Tackling credit card debt:

Balance transfers & refinancing: If you do some quick math, you’ll see that making minimum payments on a $20,000 balance at 18% interest will cost you $3,000+ in interest per year. And, that’s assuming you’re not continuing to use the card and adding to the balance. If you could minimize your interest, you could use those funds to pay off your credit card debt faster. And, that’s where balance transfers come in. When looking for a card to transfer to, make sure you check three things: the required credit score, intro interest rate, and balance transfer cost. Usually good credit cards for balance transfers will require a credit score over 650 which can be tough if you’ve been carrying a balance for a while. But, if you can find a card, you can typically expect a 0% intro APR for 12-18 months and a balance transfer fee of 0-3% of the transferred balance.

Don’t count on a windfall: Windfall payoffs are a mirage. You see them in the distance, but when you finally get there, they’re a puddle and not an oasis in the desert. Don’t wait on landing a big contract or Mr. Jones finally paying their invoice to tackle your credit card debt. Start chipping away at it today. Try to pay more than the minimum monthly payments.

Run leaner: You need to free up cash flow to pay off your debt. You can either make more (which is easier said than done and usually comes with additional expenses) or cut costs. And, not to be the guy that says avocado toast is why millennials can’t buy homes, but there may be wasted money in your business that could be redirected towards your credit card debt. Additionally, if you’re running a one-owner business, cut expenses in your personal life so your take home pay can be redirected towards your debt. Redirecting your take home pay sucks, but will save you thousands in interest down the line.

Be really honest with yourself: Many small business credit cards are personally guaranteed. Meaning, if your business fails, you’ll still be on the hook for your credit card debt. It doesn’t fold with your business. So, get honest, uncomfortably honest. Is this debt a just a stopgap? Can you make paying it off a priority? Can you overcome it? Or, is this just the status quo? Is your business really, truly struggling? If your business is finished and you know it, cut your losses before you’re buried in debt.

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Action Item: If you’re carrying large credit card debt, look at your options to refinance.

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P.S. I know the interest is tax deductible. If you want to waste $3,000+ a year with no benefit, feel free to mail me a check instead of the bank. Think of the vacation I could take.