The Credit Card Stacking Method – Startup Hack or Debt Trap?
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In a business’s early years, expenses are often high and revenues low, which makes external funding necessary. Unfortunately, it can be frustratingly difficult to obtain.
As a result, finding creative ways to qualify for financing is often one of the most significant challenges for young startups and small businesses.
Credit card stacking is an innovative approach you can substitute for a business line of credit. Here’s what you should know about it, including how it works, the pros and cons, and whether or not it’s worth it.
What Is Credit Card Stacking? How Does It Work?
Credit card stacking is an alternative financing strategy for business owners that might not qualify for a line of credit. It involves applying for multiple credit cards at once then using the ones that approve you as one big revolving credit line.
Unfortunately, traditional business lines of credit are often hard to get. Most providers have eligibility requirements that can make it difficult for many businesses to qualify.
They include criteria that you can’t change quickly or easily, such as your time in business or gross annual revenue. Meanwhile, it’s possible to qualify for most business credit cards with nothing but a high personal credit score.
Credit cards generally have lower credit limits than business lines of credit, but stacking a few of them together can make up for the difference.
For example, say you own a startup that’s been in business for four months. You bring in $40,000 in revenue during that time, but customers often pay slowly. To help smooth out your cash flows, you want a revolving line of credit for $100,000.
Unfortunately, every bank you talk to requires that you be in business for at least two years to get a line of credit. Even the most flexible online lender you can find requires that you be in business for six months.
You can’t wait to get funding, so you apply to six different credit cards using your personal credit score. Two of them deny you, but you get approval for four, and each one has a $25,000 credit limit.
With all four credit cards stacked together, you have the equivalent of an unsecured revolving line of credit for $100,000. Note that you can do the same thing with multiple loans, which is called loan stacking.
Pros of Credit Card Stacking
Getting a revolving line of credit is difficult to do during your first few years in business. The main benefit of credit card stacking is that it offers many of the same financial advantages as a line of credit, but it’s much more attainable.
Banks generally won’t be interested in working with you if your business isn’t at least two years old and bringing in $100,000 in annual revenue. Online lenders are less strict, but they still typically want at least one year in business and $50,000 in revenue.
However, you can qualify for business credit cards without meeting those requirements, as long as you have a good enough personal credit score. When you stack all your cards together, you can use them a lot like you would a line of credit.
That can be incredibly useful for a business, especially a young one that doesn’t have a significant cash reserve or struggles with cash flow. You’ll always have credit available to cover your expenses when you couldn’t otherwise.
For example, that could be when:
- You charge customers on a net-30 or net-60 basis, so you often have to wait weeks or months to get paid.
- You have a seasonal business with revenues that are inconsistent throughout the year.
In addition, there are several advantages to getting your revolving debt from credit cards rather than a business line of credit. For example, it usually takes less time and effort to apply for a personal or business card than a business line of credit.
During a line of credit application, you usually need to provide documentation that you wouldn’t have to share to get a credit card, such as previous tax returns and financial statements.
Credit cards also have a grace period of about a month during which you won’t accrue interest on your purchases, as long as you pay off your balances before it ends.
Lastly, you can benefit from credit card rewards like cash back on eligible purchases or a one-time statement credit. In addition, you may find cards that offer 0% interest for the first six to 18 months.
Cons of Credit Card Stacking
Credit card stacking sounds like an ideal workaround for young businesses that need revolving credit, but there are significant drawbacks to consider.
First, submitting multiple credit card applications at once is bad for your credit score. You’ll likely apply for a mix of business and personal credit cards, but all of them will show up as hard inquiries on your personal credit reports.
A credit card issuer might not report your activity on a business credit card to the consumer credit bureaus, but they’ll still check your personal credit when you apply, which will count against your score.
There’s no rate shopping exclusion for credit cards either, so applying for them all at once won’t reduce the number of inquiries you incur.
Second, it can be a much more expensive form of borrowing since credit cards have a higher interest rate than lines of credit. You may also end up with several cards that charge an annual fee.
The third drawback to credit card stacking is that you have to manage multiple accounts instead of one. They’ll probably have different due dates, interest rates, and cashback reward rates.
That means you’ll have to be a lot more intentional about where you spend each card and when you pay off your balances. If you had a single line of credit, it’d be a lot less complicated.
It also increases the chances that you’ll accidentally miss one of your payments, which can incur unnecessary interest charges and damage your personal and business credit scores.
Business credit cards that don’t typically report to consumer credit bureaus often will if you miss a payment, so don’t assume your personal credit is safe, even if you only use business accounts.
Finally, while it’s easier to qualify for credit cards than a business line of credit, you’ll still need to have a good credit score to pull it off. If your FICO score is less than 680, you’ll probably struggle to get enough cards for a successful stack.
Is It Worth It?
Most financing strategies have their place, and credit card stacking isn’t any different. Ultimately, whether or not it’s worth it for you depends on your needs, circumstances, and ability to use your cards safely.
Here are some questions you can ask yourself about your business to determine whether the credit card stacking strategy is worth it for you.
First, do you need revolving credit or installment debt? If you need to fund a significant, one-time purchase, you’re better off with a business loan. Credit cards won’t be a viable substitute.
You might be able to qualify for some cards that offer 0% interest for a limited time, but that’ll expire at some point, and you’ll be stuck with high-interest credit card debt.
Second, can you afford to wait? Credit card stacking is a substitute for a revolving business line of credit, but it’s not a perfect one. You’d probably be better off with a legitimate line of credit if your business can survive until you can get one.
If your business could qualify for a line of credit with a little time or effort, then credit card stacking probably won’t be worth it for you.
Third, are you willing to damage your personal credit? If you need your credit score for anything else anytime soon, credit card stacking probably isn’t worth it.
Even if you use the credit cards responsibly, you’ll be adding a hard inquiry to your credit reports for every credit card application you submit. Six at once is usually enough to make lenders consider you high risk, and stacking might require as much as 15.
Finally, can you afford it? Credit card stacking isn’t the cheapest financing option. Credit card interest rates are high, and you may also incur annual or cash advance fees.
If you think you’ll probably end up carrying unpaid balances past the grace period once your introductory 0% interest ends, credit card stacking probably won’t be worth it.
It can get expensive quickly, and if you can’t keep up with your payments, you could lose your accounts, wreck your credit score, and get stuck with thousands of dollars in high-interest credit card debt.
Who Is It Right For?
Credit card stacking is only worth considering as an alternative to a business line of credit. It can help you finance day-to-day spending or medium-sized purchases in the short term, but it’s not a viable replacement for a business loan.
Assuming what your business needs is a revolving credit line, credit card stacking might be the right choice for you if you meet the following criteria:
- In business for less than two years: Banks probably won’t work with you if you’ve been in business for less than a couple of years. You might be able to qualify with an online lender, but the costs will be significantly higher.
- Low revenues: Traditional lenders are also unwilling to lend to businesses with less than $100,000 in annual revenue. You could get one from an online lender with around $50,000, but it will again be more expensive.
- Good to excellent personal credit: You’ll need a credit score good enough to qualify for several credit cards with a high credit limit. Ideally, you’ll be targeting cards with 0% interest introductory periods too, and they can be competitive.
Credit card stacking might be right for you if you meet the conditions above. However, it still ultimately depends on whether you can find and qualify for the necessary accounts and use them responsibly.
Keep in mind that there are always risks involved, even if you’re a prime candidate for the financing strategy.
What Are Credit Card Stacking Companies and What Do They Do?
Credit card stacking companies are service providers you can hire to complete the credit card stacking process for you. They typically find the cards that match your needs and credit score, then submit applications to each credit card company for you.
Many of these companies claim they can get you an unsecured line of credit and fail to mention they’re credit card stacking. They also charge a significant fee for their services, usually around 10% of your credit limit.
For example, Credit Suite’s Credit Line Hybrid will help you get a credit card stack up to $150,000, and they charge one-time success fees of 9.9%. If you qualify for five credit cards with $15,000 limits each, you’d have a $75,000 line and owe them $7,425.
Credit card stacking companies claim they have an expert understanding of which credit cards you should apply for as justification for their high prices. They say they know the tricks to minimize the damage to your score and maximize your chances of approval.
For example, if you already have an American Express card, the card issuer usually only initiates soft inquiries for subsequent cards. Knowing these things can help you optimize your strategy.
However, it’s unlikely that their services are worth the price. You can sort through various credit cards and find the ones with favorable terms just as well as they can.
Unfortunately, there are also a lot of scammers in the industry. For example, the Federal Trade Commission sued Seed Capital for providing credit card stacking services, then tricking customers into using their cards to buy Seed Capital’s training programs.
If you’re considering credit card stacking, know that hiring a company to do it for you means taking on additional risks. It may be better to do it yourself, even though it’s more work.
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