The Slippery Slope of Credit Card Financing

You want to start a small business. Or your business needs cash to get through a slump.  How do  you get the money? If you thought, “credit cards,” you’re not alone.  The National Small Business Association says that small businesses use credit cards more than any other type of financing.

The Dangers of Credit Card Financing.  If you have really great credit, you can probably get a 0% credit card.  Then you can either (1) dump all your other business credit cards onto that one or (2) Use the zero interest one to buy stuff you need or (3) both.  But here is the danger:

You forget to make a payment. Just one payment, even a few days late, can negate the no-interest card contract.  And you will see your interest rate on that card (where, by the way, you just transferred your other balances) to over 30 percent.  No kidding.  There is pending legislation that will restrict credit card companies from changing your rate until you are 30 days late, but that legislation won’t go into effect until 2010.  Until then, you must keep your credit cards current.

Your 0% interest rate runs out. If you are keeping track, you could switch to another 0% interest card and transfer your balance to that card.  But, then you have two cards.  One with, let’s say, a 22% interest rate, and another with 0% interest.  You’ve rolled the balance to the new no-interest card, and you have the first card sitting there doing nothing.  The temptation is to use that card “just a little,” and pay the balance off every month.  You can see what a slippery slope this is.

Before you know it, you’re in trouble. Too many credit cards with too many balances can destroy your credit rating.  You won’t be able to get more credit cards at low rates, so you’ll have to pay higher rates from the get-go. And now you can’t even get a loan from a bank and you have no way to pay off the credit cards.

It’s a vicious  cycle. The only way to avoid it is to get one low-rate credit card and pay off the balance every month.  When the card rate jumps up, cut it up and cancel it.  Or just don’t get started in the first place.

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