Reducing the amount of credit card debt is an important part of managing the overall finances of your business. Unfortunately, there are a lot of wasted dollars when credit cards get out of control so let's learn about a credit card debt technique that can help you reduce your interest expense and save a boat load of cash by using simple mathematics against the credit card companies!
First and foremost, credit cards should not be your sole method of payment as the psychology of these "tools" can render a business owner out of business if the operations of the business can't finance the use of the credit card debt.
Now, if you are a new business just getting started and need to use credit cards to fund the business operations or a mature company that uses credit cards in normal operations, knowing and using the Paycheck Parking interest reduction method is a must!
How does Paycheck Parking work? Very simple...you are using the way interest is calculated on credit cards against the credit card company itself.
Most credit cards companies calculate your interest expense using an average daily balance method which means, each day, an interest figure is calculated from your current balance.
This means that if you have a large balance on your credit card and you are only making a partial payment per month, that interest starts accumulating more interest on top of prior days' interest and so forth. It's an ugly trap to get stuck in.
To counteract these killer finance charges, we use a credit card reduction technique called Paycheck Parking. Essentially, all you are doing is throwing large chunks of cash at the credit card as often as possible.
Think about this example, if your credit card balance is $10k and a customer pays you $7k, you would keep cash for anything that you can not use a credit card for (i.e. mortgage payment) and use the remaining cash to pay down the credit card.
Let's say you need to keep $2k for cash needs and you put the remaining $5k against the credit card. You just reduced your average daily balance down by $5k. You're winning because only half the interest is going to be added to the next day and on down the line it goes.
What about all your other expenses? How are those paid? Remember, you have kept cash aside for any payments that need to be made in cash, but any other payments should be made with the credit card.
Yes, the balance is going to go back up, but the fact that you nailed down the balance significantly means that much less in interest charges will accumulate as you add more expenses to the balance versus just having a high average daily balance and suffering the interest consequences.
If this debt reduction technique is used consistently over time, you will see your business is spending much less on interest than the way credit card payments have been treated traditionally.
But always remember the golden rule; if you can pay the full balance of the credit cards each month, do it. $0 in finance expenses is much better than having any interest at all!
Paycheck Parking not only works well for a business owner trying to take control of the company's finances, but this also works well for personal credit card debt reduction! Using the same principle, you will be able to cut your interest charges down considerably.