While researching many different business financing options to understand the challenges business owners face when getting capital, we stumbled upon "Credit Card Stacking". It’s a very interesting concept and it sounds too good to be true. We spent sometime looking into this option and here is what we found.
What is Credit Card Stacking?
If a company advertises that they can get your startup an unsecured line of credit of up to $150,000 with low interest rates, it’s likely they are a "Credit Card Stacking" company. Just think about it for a moment. If you were a lender, would you loan a startup that kind of money without collateral? So how do the credit card stacking companies get you an unsecured line of credit of say $100,000? Here is how it works:
- They look at your credit reports, industry and location to identify banks that will work with you.
- They submit Business and Personal Credit Cards applications to the banks for you. It’s not uncommon for them to submit 7-15 credit card applications so your total credit limit will reach your funding goal. In other words, they stack up multiple credit cards to reach your desired loan amount.
- Supposedly, they will only apply for cards that you will be qualified for and that have the lowest APR (Most likely 0% Intro APR for the first 6-18 months). Their pitch is that it’s hard for you to find the best credit cards yourself, but they are experts in business/personal credit cards. They will also try to apply for business credit cards over personal credit cards because most business credit cards don’t show up on your personal credit reports as long as you make the payments on-time. Even if you have very high credit utilization on your business credit cards, your personal FICO scores won’t be affected.
- Once the credit cards are approved and issued, you can use them as the credit line. Your intro APR will mostly likely to be low (or 0%) so you are paying very low rates for the first 6-18 months.
- If you need to get cash out of the credit line, they will also teach you how to do that without incurring a lot of cash advance fees. Usually, this is achieved through credit cards from credit unions where fees are usually really low for members.
Pro tip: Business credit cards can make sure you always have emergency cash on hand. Browse your top business credit card matches for free and apply in minutes!
The Catch(es) with Credit Card Stacking
The above all sounds good but here is the big catch: it costs 9-11% of the approved amount for the credit card stacking companies to apply for credit cards for you. In other words, if you are applying for a $50,000 line, you will have to pay $4,500 to the credit card stacking company. If you think about it, it’s paying $4,500 for a company to apply for credit cards for you. The cost sounds ludicrous to me. The worst part of it is that you can’t back out of it once they started submitting applications for you.
The following are the screenshots of a credit card stacking contract we obtained. It’s very important to read the contract carefully before you sign it. Otherwise, you might get yourself into trouble if you are not satisfied with their service.
As bolded in the fee agreement, it says *"I understand that I will be charged upon notification of approval and not receipt of the actual card; that an invoice will be sent on the same day as notification of approval; and my payment form on file will be charged the following business day. I further understand that my failure to pay said invoice within 30 days of receipt will result in my account being sent to a collection agency. If the transaction is declined, fees will be charged as per the Payment Authorization"**. In other words, if you refuse to pay them upon notification of approval, they will send it to collections 30 days after payment is due.
The following screenshot shows the fee that is being charged. The most important sentence: "You understand that we work with businesses who can obtain a minimum of $50,000.00 in financing and that the first $4500.00 paid to — is Non-Refundable if you choose to stop or cancel for any reason." Once you sign it, you are paying them $4,500 consulting fee for finding you credit cards. It’s non-refundable.
In additional to the exorbitant fees, another (smaller) catch of credit card stacking is that it will put a lot of inquiries on your credit reports. You will experience a drop of your credit scores for the next 6 months. The credit card stacking companies may or may not tell you about this, but it’s very important for you to understand that you might not able to obtain further credit in the next 6 months due to the large number of inquiries.
Is Credit Card Stacking Worth it?
So is credit card stacking worth it? We asked a bunch of business owners and the sentiment wasn’t a resounding “Yes”. I wouldn’t necessarily write it off completely. For business owners who are financially savvy and who really know what they are doing, this product can still be very helpful and can potentially be a good alternative to a short term working capital loan.
But you are just starting out, shelling out $4,500 for a bunch of credit cards may not be a wise decision. You should probably go to your bank and start with a credit card with $5,000 – $10,000 limit. There’s a reason why banks don’t lend $50,000 to a startup business. The risk is very high and if your business doesn’t work out, you will be responsible for whatever you borrow from the credit line + fees charged by the credit card stacking company.
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