Inflation and Credit Card Debt

Recent inflation has led to a broad rise in prices, which could spell trouble for individuals and businesses facing higher costs. If you're a small business owner, a major concern about inflation is how it'll impact credit and financing. To begin navigating this issue, it's important to look carefully at the intersection of the two.

How does inflation affect credit?

Inflation and credit interact in a few ways. First, there's a link between inflation and credit card debt. As prices rise, households and businesses may struggle to keep up with higher bills. If they don't have sufficient cash flow to pay the higher prices, they might turn to credit cards to make up the difference. Inflation can drive up credit utilization rates.

Inflation also indirectly affects the interest charged on credit cards and loans. Policymakers generally respond to high inflation by raising interest rates. When they go up on credit cards, the rates for lines of credit and loans with variable annual percentage rates also go up, and consumers and businesses must pay more on existing debts. When people then apply for new loans or open new credit accounts, they face a higher cost of borrowing.

This combination of higher credit use and steep interest rate increases can be challenging for borrowers, making it more difficult for consumers and businesses to repay debts on time. This can lead to hurt credit ratings and loan approvals in the future.

What does this mean for small business owners?

As prices climb, you might have to borrow more to outbid your competitors for needed equipment or materials. This may create more debt than normal, weighing down balance sheets. You could therefore find yourself priced out of some loans and have to postpone planned expansions and upgrades until credit is more affordable.

If you decide to go ahead with expensive borrowing, you might have to cut back on spending in other areas—including hiring more staff, improving cybersecurity or launching a new product line.

What's the best way to manage your business finances when inflation is high?

Running a small business while inflation rages is a challenge, but you can mitigate its detrimental effects. These tips can help you make the best of a difficult situation.

• Maximize credit card rewards. Look for a business credit card that offers cash back on spending across the board or rewards in categories where you spend a lot. While they won't fully offset increased borrowing costs or price pressures, they can make your credit card bills a bit more manageable.
• Pay off credit cards in full each month. Many cards offer a grace period so you aren't charged interest if you pay your entire balance within a set timeframe.
• Consider consolidating debts with a balance transfer card. Given the link between inflation and credit card debt, your business may end up carrying multiple balances as price increases run their course. A balance transfer card can give you a reprieve from the high interest rates that are typical during periods of inflation. You can easily calculate whether to consolidate your business debt.
• Pay off accounts with the highest interest rates first. Prioritizing your most expensive debts is particularly important when costs and interest are high.
• If you need to borrow a larger amount, consider taking out a term loan or opening a line of credit. These options often come with lower interest rates than credit cards.
• Keep an eye on your business credit score. Ask for a full credit report from one of the three major credit bureaus at regular intervals to check for any inaccuracies that could impact your access to credit.
• Look for small business grants offered by your state and local government or nonprofits. If you don't find an affordable loan, a grant could be a path to funding.
• Collaborate with other local businesses. You may be able to keep costs down and reduce your need to borrow if you pool resources with other entrepreneurs. For example, you might share equipment or space, or conduct a marketing campaign together.
• Stay in touch with your small business banker. Talk to them about your company's needs and goals. When your banker knows your business well, they're better able to offer personalized insight into your situation and direct you to suitable financing options.

The bottom line

Inflation can certainly pose challenges to your credit on multiple levels, but smart planning and action can blunt the sharpest edges. More often than not, implementing changes like consolidating business debt and shopping for the best rates to minimize their impact will pay off in the long run—even when inflation begins to subside. And you'll ideally come out on the other side with a leaner, smarter and savvier business.