Disadvantages of using credit card to fund your business – Credit Card Series

A business needs fund. Credit card is one of such sources. An entrepreneur is tempted to maximize his use of credit card to fund his business. Since he does not have any other way of funding his venture, credit card seems like an easy money. Just swipe and buy anything he wants.

While the use of credit card is necessary and useful at some places, excessive use of credit card for business is detrimental to an individual and his business. It may lead to bankruptcy and legal suites. Let us discuss some of the disadvantages when you fund your business needs with a credit card.

  1. High levels of temptation
  2. Since it is easy money, the threshold to spend now is very low. That means you tend to buy more when you are buying with credit card than when you buy with cash. Also there is a tendency to spend more times compared to the cash which gets over in your pocket at regular intervals. More use means more debt.

  3. High Interest rates
  4. In India credit card rates on a rolling balance are around 40-50%.(3-4% p.m). It would take six years to repay your amount( based on credit card company study ) if you let your outstanding amount rollover. Some credit card add previously full due amount to your card to your new card due, even if you have paid the last amount partially. It is strange but I have seen it happen. That means interest will be calculated on total amount due + partial amount. Credit card rates are high in all parts of world, much much higher than any bank loan.

  5. Lowering of credit score
  6. If you are unable to use pay a credit card the dues on you, your credit score suffers a setback. It might take many on time repayments before it is set right. Bad credit score mean that you might be denied loans and credit for even mortgage and purchases.

  7. Exposure to credit card fraud
  8. Using credit card online means someone is storing it on their servers. All credit card details are prone to hacking. A recent Sony hack has revealed millions of credit card numbers to the world. While it is easy to detect such big levels of fraud, you might not even notice that your card is being misused until you receive a credit card statement. Also if you use your credit card on sites that use insecure connection over the internet , your card information may be intercepted while it travels through internet.

  9. Extremely high rate of return required
  10. If you plan to use credit card as your primary source of funding for your venture, beware that it is not possible to repay the credit card balance(if rolled over) by any business returns. A business returns of over 40-50% on money invested are phenomenal and uncommon. You are set to straight losses if you use credit card for your business.

  11. Financial cost of default
  12. The financial costs of default is very high. Imagine when you are asked to pay total interest + bank penalties + legal costs. In business risk is a necessary evil but defaulting presents huge challenge to your capacity to raise credit in future and start any other new venture.

About The Author

Posted in Categories: Credit Card Series
Tags:

Your comments and replies

    • Hey Vamsi,
      Judicious and safe use of credit card is always good. You may use credit card at secure and safe sites which have proper security certificates. I also use credit card and I pay all the dues in time and keep the card safe.

      Go ahead and use the card with all the precautions in the mind. No need to worry

      Ashvini Kumar Saxena's latest article :Finding a great employee

  • It is so nice to have your own credit card because you can buy all the things that you want even though you do not have your salary yet. However, we should try to understand that if we go beyond our means, we will be facing big predicaments in the future. And your tips are just the reminders that credit cards are for emergency use only. Thanks. :)

  • This excellent post-Very informative. I’ve been trying to apply for a credit card for a year now, my last application was disapproved. However, after your post, I’ve changed my mind- I think I should stop finding ways just to have my credit card- I don’t want to fall into a debt trap- Thanks for your post-

  • That temptation to use them is a huge one, Ashvini. It’s just so easy. Even the most disciplined of entrepreneurs succumb to the temptation. I’ve been there before in my business, but now it’s no debt and cash/check/debit cards only. It was a painful process to get to this point, but the freedom this has given me is worth its weight in gold. Many small business owners found out during this recession about the other points in your post after they gave into the first one.

    • Hi Brad,
      Welcome to my site, first of all and thank you very much for your comment.
      I too had issues with credit card in my personal life. I was bad in
      repayment(just lazy) and it got me into a bad credit score. Since then I
      worked hard to improve my ranking. Your experience add credibility to my
      post.

  • I personally despise the entire concept of “credit”… in fact, it is not any help but rather a form of bondage! If credit was never created, people wouldn’t have this mentallity of “buy now pay later… err, pay never and default on everything we own” which is why the world’s economy is collapsing.

    It’s hard to measure the rate at which spending is done when the money was never there to back it to begin with. What happens when what is owed outweighs what can pay it off? That’s exactly what’s happening ALL OVER the world right now, and American’s inception of credit has spurred this catastrophic decline.

    Good post, people should beware the seemingly harmless implications that debt really have, ESPECIALLY from credit cards!

  • I don’t why but everytime I hear about credit card, its all negative. There seems to be so much concern with these type of cards. Yes, security is one of the major concerns and the recent fiasco in sony’s online network does make it all look so creepy! You never know but it can happen to anyone and so therefore, I have also changed my plan for the time being. Yes, no such plans for the time being. I will better take help from your side for the same..:P

    Btw, everyone must be aware of pros and cons of such cards at least if you have any such plan to fund your own business. Great points…extremely useful and informative!

    • Great that you liked the post. Many people lack financial education and hence fall into debt trap. My next part of series is about how to make use of credit card in a better way

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Enter your feed Address in the field below

Comment Juice: Get some juice with Pizza