Credit card debt kills a business owner or individual's financial progress as there are many wasted dollars going to interest. Poof, the cash is gone into thin air. The best thing you can do is get rid of the debt is by using the power of compounding interest against itself. This is coined as the term "Paycheck Parking".
Paycheck Parking is a very simple, but powerful concept.
Most people try to chip away at the debt by paying the minimum balance plus some kind of
amount that makes them feel like they are substantially chopping the credit card debt tree down. Unfortunately, the math behind credit card debt (compounding interest) runs over those small attempts to bring the balance down.
The minimum balance really is just covering most of the interest in any given period. So by making just the minimum payment and ceasing use of the card, it literally will take years to payoff the balance, even a balance that would be considered small.
Yes, the credit card companies make bank! They take advantage of the fact that this economy is run on credit and, in order for us to function as a society, we just keep trying to keep the balances down all the while we are blowing loads of cash on interest and...the rich get richer.
So, instead of getting demolished by compound interest, let's get on the offensive and kick it's tail by using the same principle against it.
Let's say that you have $10,000 of credit card debt as an individual and that you bring home $5,000 every month in wages.
The first thing you need to do is pay anything that you can NOT use a credit card on.
Now, let's say you can't put your $1,000 mortgage on the credit card (most mortgage companies don't allow it), so that is paid out of the bank account. Since you received $5,000 as wages, less the mortgage, you now have $4,000 left in the bank account. Your next step is to take a large chunk of that cash and throw it at the credit card debt!
You take $3,500 of that cash and pay the credit card. The balance now is $6,500. Essentially, what you are doing is knocking the "Average Daily Balance" down by making a bulk payment to the balance. Then, you use that credit card to live on.
Yes, the balance will go back up, but because you paid $3,500 down on the card, that credit card balance was smaller, on a day to day basis, which lowers the Average Daily Balance. Because this balance was lower, the amount added back to your card in interest is lower.
If you continue to take this action on a monthly basis, you will find that you will get that credit card balance paid off extremely faster than any other method you could use (other than refinancing and paying the balance off).
Obviously, this same principle exists for a business! It may not be called Paycheck Parking, but rather "Earnings Parking" or something clever like that, but it will work just the same.
If my Cash Flow is accurate, I should know what type of leftover cash I am going to have each month. Once I measure the forecasted versus the actuals, I can fine tune the company's credit card payment and send a significant amount to bring the balance down and start rebuilding the balance with the company's expenses, but at a much lower interest hit because I used this credit card debt strategy.
If you have any questions about Paycheck Parking or the debt that you may be dealing with, feel free to contact me.
Blue Collar CFO