What is credit card float and how does it work?
Master the credit card float: learn how to use it wisely, avoid debt, and get the most from your rewards.
Have you ever bought something on a credit card, knowing that you don’t have the cash to pay for it today, but you will have the funds at the end of the month when the credit card bill is due?
We’ve all done it, and it’s called credit card float.
Credit card float is a way to purchase goods or services that you need or want now by relying on future income to pay it off.
When your income is assured and steady, this can be a convenient way to operate.
However, if business is uncertain or your income is compromised, credit card float can become a tricky situation. Let’s dive in deeper to explore why.
What is credit card float?
Credit card float is the period of time between when a credit card purchase is made, and when the payment is actually debited from your account. During that time, the money is “floating” in a state of limbo, spent but not yet paid. Waiting in your account, it can be used for other things during that time, such as more urgent payments or accruing interest.
Imagine you own a plumbing business and your van requires hefty repairs, totalling $1600. The repairs must be done now, in mid-October, but you only have $1000 in available cash. You’re expecting a payment of $4000 to come in for a big job you completed last month, but the payment is only due to arrive on the November 1. So you pay for the van repairs on credit card, leaving your available cash intact, and expecting to pay off the credit card bill next month once the $4000 payment comes in. That’s an example of credit card float.
Benefits and risks of credit card float
Essentially, credit card float uses current income to pay off older credit card debts. This can be helpful or problematic, depending on the business’s financial circumstances. Here’s a breakdown of the potential benefits and risks if you were to float a credit card balance on a regular basis:
The potential benefits of credit card float
There are plenty of advantages for small business owners to pay with credit cards, including credit card float.
Here are several benefits of credit card float that businesses can enjoy:
- Improve cash flow: Credit card float allows businesses to delay payments for up to 30 to 45 days, or sometimes a bit longer, freeing up cash flow before expenses are due.
- Short-term financing: Think of credit card float as interest-free short-term financing (as long as the balance is paid in full by the due date). This can help businesses manage immediate costs without taking expensive loans.
- Flexibility for purchasing: With credit card float, businesses can make necessary purchases or investments without needing cash on hand. This gives you far more flexibility in business operations.
The risks of credit card float
Credit card float may seem like a saving grace. However, it is too easy to get stuck in a cycle of paying yesterday’s debts with today’s income. This can make it difficult for businesses to stay financially healthy. Why? There’s a few reasons:
- Accumulating interest and fees: Relying on credit cards can quickly lead to high interest and fees, if the balance is not paid in full or on time. This can be risky as it puts an added strain on the business’s finances.
- Over-reliance on credit: Credit card float can make it seem that your business has more funds than it actually does. When you rely too much on credit, this can mask underlying cash flow problems, so it is more difficult to see the clear financial picture. Over time, debt can rack up, getting the business even deeper into murky waters.
- Impact on credit score: Businesses that have consistently high balances on credit cards may find their credit score impacted negatively. This can make it harder to secure financing in the future and remain stable in the long term.
How to get “free float” using credit cards
Once you understand credit card billing cycles, you can easily take advantage of credit card float.
Every credit card company gives their customers about 30 days (in some cases 60 days) to use their card before it starts billing for purchases. The credit card company also gives customers about 20 days to pay for the purchases. That’s about 50 days of “free float” for business purchases just after the cycle ends.
Why should your business take advantage of “free float?”
If your small business is like most, it probably has around 30 days of cash on hand. Put another way: if your cash flow was suddenly cut off or if your business is hit with a large or unexpected expense, your business could stop running in 30 days.
If you’d taken advantage of “free float” by using your credit card for your business expenses, your business could keep going for an additional 45 days or even longer. If business expenses spike during a busy season, if cash flow is poor during a particular time period, or if you’re making purchases for a big project, credit card float gives you a lot of additional time to generate cash to pay for these or other purchases.
How to get an additional 45 days to pay your business bills
Payment float, credit cards, what does it all mean in practice?
It means that you can have up to 45 extra days (or even a bit more) to pay your business bills, which can make a big difference.
How? It’s simple. With Melio, users can pay vendor invoices with their credit card now (even if they don’t have the immediate cash), and the vendor receives the payment on time via their chosen method. Remember, the credit card payment is not deducted from the user’s bank account for up to 45 days or longer, depending on when the payment was made.
This way, Melio users can take advantage of credit card payments to earn card rewards and cash back. At the same time, they can leverage credit card float to extend their payment times for vendor bills and dramatically improve their cash flow.
What if vendors don’t accept card payments?
Not all vendors accept credit card payments, but with Melio, you can still pay with credit card and gain the benefits of credit card float.
Melio processes card payments on behalf of the user, and then sends the payment to the vendor in whatever format they choose, whether it be direct deposit or check. Pay any vendor, including suppliers, utility companies, and more, with a credit card using Melio, and take advantage of “free float”.
Also, business owners can use Melio to schedule credit card payments in advance so they never miss a payment or pay late. This reduces the potential pitfalls of credit card float, so your business benefits.
How to avoid credit card float?
Credit card float is a tool that can be used for good or bad; it’s just a matter of using it wisely. If you want to know how to get out of credit card float or avoid it altogether, there are several tips to follow:
Keep cash in reserves
Running a business has its ups and downs, so it’s important to maintain a buffer for cash flow emergencies. During slow periods or if an unexpected expense arises, keeping emergency cash on hand means you won’t need to rely as much on credit card float to carry you over.
Watch your expenses closely
Keep a close eye on your bank balance, projected income, and credit card expenses. This will make it easier to know when you are falling into the trap of credit card float and spending more than you will be able to pay off in the foreseeable future.
Set automated payment alerts
Use a tool like Melio that allows you to set up automated alerts or reminders for credit card due dates. That way, you can be sure to pay on time and prevent rolling balances into the next period. It also helps you avoid late fees and high interest charges that can build up when your credit card float usage gets out of hand.
Striking the balance: Make credit card float work for you
If you want to leverage the potential benefits of credit card float, make sure you have a tool on hand that allows you to manage it properly.
With Melio, you can pay your business bills with a credit card, ensure each vendor receives the payment method they prefer, schedule automated reminders and payments, and keep track of your credit card payment and business expenses, all from within one easy-to-use platform. These capabilities are what you need to avoid the traps of credit card float while enjoying the benefits for your business.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.
