When your company has credit card debt, there’s almost always a logical reason for it, financing growth being at the top of the list. But it’s not a great idea to carry a lot of debt year over year. In a recent post on my Inc. magazine column, I tell the story of Jason and Kate McCrea, great people with a big problem.
Jason and Kate founded McCrea’s Candies, a Boston based business that makes handcrafted caramels. Since 2010, they’ve been making their specialty candies, and enjoyed at least 30% growth annually for several years in a row, which encouraged the McCrea’s to position their company better to meet the increased demand and foster growth.
“With all those orders coming in, the McCrea’s needed cash to pay for supplies to make, package, and ship their product. When it was clear their own savings and loans from friends and family would not be enough, they raised more by signing up for zero-interest credit cards.”
Zero interest sounds great, and is great if you can pay it off quickly. The key point to remember is that zero interest isn’t forever.
“The deal with these cards is you can spend up to your credit limit and the money is interest-free for a given period of time, usually about a year. But if it isn’t paid off by the end of that period, you owe interest on the outstanding balance at whatever rate the credit card company charges. That rate can range from 14 to 25 percent.”
The McCrea’s weren’t able to pay off their credit card debt in time to enjoy the zero percent interest. When sales plateaued in 2018, they began to realize the full extent of the danger the debt was putting their business in. That’s when they came to see me. The first thing I did was establish that their business was indeed viable – by analyzing what their profits would be if the credit card debt were gone and they didn’t pull too much out in salary and perks. They also described for me their current plan for paying off the debt. It involved giving each card the minimum payment plus a little bit more. I quickly advised them to use a different, more effective strategy.
What Jason and Kate were doing was essentially “topping off” the minimum payment. It’s a drop in the bucket, makes very little difference in the long run and gives your business little bargaining power in negotiating a lower interest rate with the bank. Instead, I advised them to line up their credit card debt from highest interest rate to lowest. Pay the minimum on every card except for the one with the highest interest rate. Every penny of what they were topping off the other cards with should go to that card alone.
“Once that one was paid off, they could focus on the card with the next highest interest rate and do the same–and so on until they retired all of their credit card debt.”
This also puts them in a better position to ask for a lower interest rate on some of their cards. The McCrea’s have already begun to put this new plan into action, and I’ll check up on them in the future to see how they’re doing. I’ve no doubt that McCrea’s Candies will get past this bump in the road and reach its next level of success.
Read Norm Brodsky’s article in its original form at Inc. Magazine’s website.