Kabbage Blog

Looking for more resources? The Kabbage Greenhouse brings together all the best advice, trends and information for small businesses.

Looking for more business resources? Check out the Kabbage Greenhouse.

Check it out
Visit Us

Business Credit, Finance & Accounting

Credit Cards

What’s left to say about credit cards? It’s often a weighty topic of discussion on the nightly news and at dinner tables across the country. The reason for such topicality — along with their widespread use — is likely the difference between a credit card and a charge card (which you must pay back in full each month). In short, many people carry balances on their credit cards and therefore owe the credit card company money. And while there are no longer any debtor’s prisons, this is still not a good thing for individuals, families or our country.

Credit cards are similar to lines of credit. If you don’t have the cash to pay for an item you can borrow it on your card from the carrier. The big benefit is convenience; you can certainly get a line of credit from a bank with a low interest rate but you can’t really flash that line of credit while in line at Banana Republic. Another small benefit of the credit card is that you don’t start accruing interest on a purchase until the end of the month when the bill comes. So, if for example, you buy a new book (people still buy books?) on April 2nd you want have to pay for it until April 30th — and the amount won’t have accrued interest during that time.

Of course there are also late payment and annual fees for any balances remaining on the card. In general, as you possibly already know, the ease of credit cards can make them a very easy avenue toward serious debt issues. Banks don’t give out the cards based on charity or a desire to help people; instead they are very large source revenues for large institutions. In other words educate yourself about the fee structure before signing on the dotted line for a card.

It is also important to understand that making the minimum payment on a credit card each month is one of the main reasons why many people are in financial trouble. For example, if you charge a total of $1000 on your credit card, your monthly minimum payment might be only $20 but only half of that amount goes towards the principle and the rest is interest. People usually think that paying only $20 a month for a debt of $1000 is not much and they are more inclined to keep charging the credit cards. Soon enough, the minimum payments and interests will rise and people struggle to meet the minimum payments. They might even miss some and they will themselves in a very hard financial situation.

Individuals might have to opt for credit cards as a way to access more capital, as personal lines of credit are much rarer and usually have draconian terms attached. Small businesses, on the other hand, have more options including venture capital and small business loans.

 

If you want to better understand a line of credit versus credit card, take a look at the “Compare Funding” page on the Kabbage site.