Key Podcast Highlights

Is Credit Card Debt Good or Bad?

  • Credit cards can be a strong option for short-term financing. The best way to use a credit card is to avoid having a big balance open for a long period of time where you’re getting a lot of interest. Instead use if for short-term purchases and pay it off in a month or two.

  • Credit cards can also offer extra benefits, including:

    • The ability to make a quick payment without needing to write checks
    • Being widely accepted across the U.S. and internationally.

What Should You Do if Your Credit Card Balance Is Too High?

1. You can convert your credit card debt to another form of debt. For instance, if you have a home that you own, business or property, you can convert it to an equity loan that’s secured by that property or asset. With this option, you’ll still be paying interest but the interest rate will likely be half what you’re paying for the credit card company.

2. Be your own banker. If you’ve got a credit card balance of $5,000, $10,000 or higher, freeze it, cut up the card and don’t use it any further. You can work with your accountant to come up with a payment plan to help pay it down. You can pay it off in large chunks over 3, 6 or 9 months.

Transcript

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Gene (00:02):

Hey everybody, it’s Gene Marks and welcome to this week’s episode of the Hartford Small Biz Ahead podcast. This week, I wanna talk to you a little bit about credit cards and managing your credit card debt and give you some thoughts on credit cards. The topic comes because there was recent news about credit card debt, that I thought would be of interest to you. First of all, Bank of America released a survey just the past couple weeks that said that small businesses are relying more on credit cards to finance their operations. Since 2019, small business credit card balances are up 18% according to the bank. Now, there’s no reason to panic about this right now. A Bank of America analyst said that while rising credit card balances could raise some concerns, they’re noting a few reasons to be less pessimistic.

Gene (00:54):

The biggest is that the ratio of total bank loans, which include credit card loans and the net worth for non-financial, non-corporate businesses, that’s us small businesses, still remains at historically low levels, Bank of America says. They say that overall, the overall balance sheet conditions are there for relatively healthy for small businesses. So just the takeaway, just wanna be clear… credit card debt is up a lot since it was, pre-pandemic. But we’re not at levels where anybody is panicking right now or upset about it, we’re at a stage right now where, we’re keeping an eye on it. But let’s talk about credit card debt and your business. Is credit card debt good or bad? And what happens if you have a little too much credit card debt?

Gene (01:40):

Well, for starters, I’m a big fan of credit cards for small businesses. I know that might go against the common vernacular but credit cards can provide a really strong short-term financing tool. It’s all about return on investment, isn’t it? I mean, I know that credit card rates can be as high or as the 20%, 25% annually. I get that. But the idea here is not to be paying an annual rate for your credit cards. The idea is not to have a big balance open for a long period of time where you’re really getting killed by interest. I have a lot of clients that use credit cards for very short term purposes. They do their best to pay it off in a month. Sometimes they might pay it off in two or three months.

Gene (02:26):

But even so, that’s just an extra fee that you’re paying to get that short quick term financing available. Particularly in these times where getting financing from banks are harder with interest rates as high as they are. So, it’s just a very readily available and acceptable short term financing tool. And credit cards do provide some pretty good benefits. I mean, we can make a quick payment with a credit card. We don’t have to like write checks and go through that process. There’s certainly a wider acceptance of credit cards. I mean, across businesses across the country and even international, if you’re the kind of business that buys things internationally, using your credit card is a great way to make payments rather than dealing with, wire transfers or whatnot.

Gene (03:12):

Obviously, we know that credit cards offer points and discounts. I’ll get to that in a minute. But those are certainly incentives. Most of the good credit cards, that I see offer good reporting as well. So you can get reports both, month and annual that divide up your expenses by categories and really help you with the accounting a lot more. So I really do think that there are some advantages to using credit cards. Now, how do you find the right credit card for your business? There’s a lot of places out there that offer, some advice. The two places that I like to recommend… I like going to NerdWallet.

Gene (03:54):

That’s a financial, platform publication platform. They always do reviews of credit cards with a lot of really great in-depth articles for small businesses as well as consumers, comparing different credit cards to each other. And then I also like Credit Karma, which is owned by Intuit, the software maker of QuickBooks and Quicken and whatnot. But Credit Karma also has a very large community of small businesses. A lot of writing on it, a lot of help. You can enter in a lot of your financial information. It will do its best to match you with the credit card that’s that’s right for your circumstances. So there are definitely a place to get advice and also get connected to the right kind of credit cards for you. So, that’s where you go.

Gene (04:38):

I think to find the right credit card for your business. I also wanna also talk to you a little bit about discounts and points. Like a lot of people gravitate towards the points because they’re kind of sexy, you build up points and you can use it for travel or gifts or all that kind of stuff. I think, gathering up points is kind of fun to do. I think that you can always take points and convert them into gift certificates. You can use them to give to employees if you want to or to customers, good customers, or obviously use them for yourself. And a lot of platforms like Amazon and others, they partner with credit cards.

Gene (05:16):

You could use credit cards for points on airlines. The bottom line is though, you’re gonna get your best value with the cash back. If you can find a credit card that gives you 2% or even 2.5% cash back on your purchases. I know that’s not as sexy as getting the points, but in the end, you’re gonna earn more. The points that these credit card companies convert, they use their formulas for converting and come on you and I don’t know what those formulas are. And they, they change based on the fluctuation of prices and whatnot. And let’s all agree, they’re probably, these formulas are designed to benefit the credit card companies, not necessarily us. A flat 2% cash back, “hey man, you can’t deny that.” I mean, that is what it is.

Gene (05:57):

And then you get the cash put right back into your pocket. One of the things I love, by the way, if you haven’t already, we’ve signed up as a business for Amazon’s credit card. That gives you a 5% discount on any purchases made on Amazon’s website – 5%… That really adds up. And like a lot of small businesses, we buy a lot of products on Amazon that’s used in our business, in our office and for our employees. And you get a 5% discount when you use Amazon’s credit card. So just saying the cash discounts are usually like the best deal that you want to go for. Now, say your credit card balance is getting up too high, like what do you do? Well there’s really two main strategies for paying down your credit cards.

Gene (06:41):

Okay? First, if you can convert it to some other form of debt, that’s the best strategy for you. If you have a home that you own or a business or a property and you can convert it to like an equity loan that’s secured by that property or by that asset, you’re much better off doing that. I mean, even if you have a home equity loan and there’s, you can get one, because you’ve got equity in your home or in your business, you can move your credit card debt over to that. Obviously, you’re still gonna be paying interest, but the interest rate will, could likely be half what you’re paying the credit card company. So if you’re carrying a large credit card balance, my suggestion is you really talk to your bank and see if you can convert it into a home equity loan or a loan that’s collateralized by some assets in your business. Long term…

Gene (07:29):

You will definitely pay less interest by doing that. And secondly, if you don’t have that availability, what you really need to do is be your own banker. If you’ve got a credit card balance of $5,000 or $10,000 or whatever it is, freeze it, cut up the card, don’t use it any further. Look at that card itself, see what the balance is, and then you have to internally and maybe with your accountant, come up with a payment plan to pay it down. It should be a first priority. If you’re paying anywhere from 18% to 25% on a credit card balance, and it’s a long-term financing thing, it’s really expensive. So you really have to say to yourself, okay, enough is enough. I have this money on my credit card, I’m not gonna use the credit card anymore.

Gene (08:09):

I’m just gonna have a payment plan to pay it off in big chunks over the next, 3, 6, 9 months. You can get it down to where it is. Maybe you have to sacrifice payments from somewhere else or even payments to yourself. But I think it’s really, really important to get that down. Okay. Alright. So just as a quick recap, I’m a fan of credit cards. They offer quick and easy payments. They’re a great short-term financing tool. They have wider acceptance. You can use ’em for international payments. They offer points and discounts. They have good reporting. It’s all good stuff. I mean, I’m a fan of using a credit card for your business. It’s fine. Just use it responsibly. Go to NerdWallet or Credit Karma if you’re researching credit cards for your business, lean towards cash discounts, not points.

Gene (08:51):

I know it’s exciting to get the points, but you’ll get a better deal with cash discounts. If you have a big balance and you need to pay it down, try to convert it into either your home equity loan or a loan that’s collateralized by assets of your business or even personal assets, you’ll pay less interest longer term. If you can’t do that, you gotta look yourself in the mirror and come up with a payment plan for yourself to pay down chunks of that credit card, freeze any purchases, and get that credit card paid down, sooner rather than later because again, paying 18% to 25% interest is just, it’s pretty high and pretty crazy. My name is Gene Marks. Those are my thoughts on credit cards for your business. We’re seeing a lot more businesses rely on credit cards, so this is something that would be of interest to you. I hope this information and advice helps. If you’re looking for any more tips or advice or help in running your business, please visit us at the Hartford SmallBizAhead.com site or SBA.TheHartford.com. Thanks so much for listening. Hope you enjoyed it. Got some good information. I’ll be back to you next week with some other tips to help you run your business. Talk to you then. Take care.

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