There’s been an overwhelming rise in personal and business bankruptcies over the past year, a rise that seems distinctly out of place in today’s ‘recovering’ business environment. With a large number of Britain’s consumers financially stretched and an even larger number of businesses pushed to the limit, debt-ridden spending sprees and unsustainable borrowing appear to be becoming the norm.
But there’s no sense in borrowing without a strategy, as the recent wave of company insolvencies has demonstrated. Credit cards and corporate billing accounts can be tools of financial strength, but for today’s debt-troubled consumers appear to be little more than vices for irresponsible spending.
We’ve tracked down seven credit card mistakes, debt disasters, and bankruptcy errors which seem to keep popping up, both in personal and business bankruptcy cases. If you want to secure your debt and keep your finances healthy, it might be best to work these debt disaster fixes into your financial acumen.
1. Juggling “Zero Interest” Credit Cards
As tempting as those ultra-low introductory rates can be, they’re rarely something that lasts longer than a couple of months. Consumers and businesses alike are constantly caught out by zero-percent credit cards and ultra-low starting balances, leading to massive initial spending and an expensive repayment process.
Always look beyond the introductory interest rates, and calculate how much you’ll be paying over a year or two. Creditors have used ultra-low introductory rates to gain customers for years, often at the expense of businesses and consumers looking for easy credit.
2. Closing Zero-Balance Credit Accounts
Every business owner is familiar with the importance of cash flow. Whether they’re a sales-based operator or the leader of a service business, the importance of steady income and quick financial access is essential for the survival of any business. This year’s biggest company insolvency cases have rarely been due to a poor business strategy or dead market – most have been prompted by limited cash flow and poor access to credit.
As tempting as it may be to shred your credit card, close your accounts, and remove the temptation of borrowing, it’s rarely the best strategy. Your company’s credit score is calculated by its access to debt and the amount which is used, leaving every closed account as little more than a point against you. Let zero-interest accounts sit without use, but don’t close them out of pride or temptation.
3. Managing Too Many Credit Cards
There are hundreds of assumptions about personal debt, the most pervasive and irritating of which is that access to debt is what drives people to overspend and look past financial planning. It’s an idea that’s made credit cards an ‘evil’ force in the world, and it’s one that’s very much untrue given the huge variation in spending needs and credit usages.
There’s nothing ‘evil’ about having access to debt, but plenty of poor strategy in having confusing access to debt. We’ve all heard classic horror stories about juggling different credit card debts and repaying one with another, and most of us have wondered just how such a situation happens. Keep your access to debt open and you’ll gain opportunities; keep it confusing due to several different credit cards, overdrafts, and borrowing outlets and you’ll end up tempted to use and every each one.
4. Completely Avoiding Debt
Striking the perfect credit score requires a careful level of balance. Those who leap into the world of credit cards and overdrafts tend to stay there, forever repaying purchases made years ago and utterly frozen by their financial decisions. On the other hand, those that ignore debt entirely can end up in a similar situation, unable to find major loan providers due to their limited credit history.
We thin it’s best to take on a small amount of debt at some point, at the very least to create a record of spending and timely repayments. Think of short-term debts as a long-term investment; paying an extra hundred pounds for a hire purchase television may help you negotiate a better rate on your car repayments, home mortgage, or future business financing.
5. Limiting the Amount You Can Borrow
Building and maintaining a great credit score can be tough. There’s the endless small purchases, the never-ending short-term loans, and a gradual build-up of financed expenses to stick to. There’s also the temptation to limit your access to credit – a mistake that many would-be borrowers make when trying to make their credit profile appear ‘responsible’ and restrained.
Paradoxically, few creditors are interested in your credit-based modesty. Most view your access to credit as a good thing, rewarding borrowers who give themselves access to credit but rarely make use of it. Don’t be afraid of a £40,000 credit limit and certainly don’t think it’s something that you should worry about; creditors will view a rarely used credit facility as a sign of your responsibility.
6. Rushing Through Business Structure and Formation
Whenever there’s equity involved, there’s a chance for shady characters to give themselves an unfair advantage. Founding a business or company can be a stressful process, but it’s a process that’s best extended and checked for any possible errors.
That misplaced signature, misspelled word, or poorly written document could end up making you liable for debt that you never knew anything about. The list of equity disasters and contract wording nightmares is acres long – look at Apple’s initial cofounder Ronald Wayne for a classic tale of early contract negotiations gone awry.
7. Using Debt at the Expense of Cash Flow
Over the last two years, thousands of British businesses have been forced to file for bankruptcy due to limited cash flow and depleted short-term capital. It’s a phenomenon that’s occurred slightly after the financial crisis, and we believe it’s due to the exhaustion of debt options.
It’s tempting to think that a large line of credit can insulate your business from late payments and cash flow disasters, but it’s rarely the case. Rely on credit and you could find your business like so many others – unable to meet expenses and facing a possible bankruptcy. Balance your short-term income and long-term debt options and you’ll face a more secure financial future.