How Multilevel Marketing Can Cause Credit Card Debt

Quick Answer

Multilevel marketing promises personal freedom and financial opportunity, but it comes with risks of tricky financing and credit card debt.

A woman frowns as she hold her hands to her face while holding her credit card with her phone on the table.

Taking on a business opportunity that promises to give you more time, more money and more flexibility sounds like a no-brainer. But when these opportunities come in the form of multilevel marketing (MLM) businesses, the risk of credit card debt may outweigh any potential rewards.

Here's what you need to know about financing for MLM businesses and what to do if you've acquired debt to participate in one.

What Are MLMs?

MLMs are companies that enlist independent contractors to participate in direct sales of products and services. These contractors—often known as consultants or distributors—are expected to purchase their own stock of products from the company to resell at higher prices.

Making money in MLMs is notoriously difficult. First, purchasing goods to sell results in high startup costs. Once you get started, difficulty making sales, adhering to monthly product purchase requirements and paying additional costs such as packaging or shipping can cause participants to wind up losing money instead of making it.

Financing limitations may compound losses. Because MLMs are not considered small businesses, they are ineligible for many forms of traditional business financing, such as small business loans from the Small Business Administration. This means MLM participants may turn to borrowing options such as credit cards or personal loans, which have interest rates that can easily cancel out any gains.

The Federal Trade Commission (FTC) suggests that potential MLM recruits directly ask current consultants if they have borrowed money or used credit cards to fund their work, and how much they still owe.

What Are the Dangers of Loan and Credit Card Debt?

Unfortunately, the debt associated with MLMs is more than just another bill to pay. The dangers of incurring debt—particularly large amounts of high-interest debt—are multifold.

  • Cost of the debt: When you borrow money, interest continues to accrue until the balance is paid off. If you have a high interest rate and are only able to make minimum payments, the interest could eventually amount to more than the total you originally borrowed.
  • Possibly missing payments: As debt mounts and sales don't pan out, it becomes more likely that you may miss a payment on your debt or another bill. Missed bill payments could lead to consequences such as vehicle repossession or your utilities being shut off. Missed or late payments may also be reported to the credit bureaus and result in credit score harm.
  • High credit utilization: When you carry a high credit card balance, your credit score may go down. That's because credit utilization—or the amount of credit you've used compared with your credit limits—is an important factor in credit scores. Ideally, you want to keep credit utilization under 10%.
  • Increased debt-to-income ratio (DTI): Your DTI measures how your debt obligations compare with your income. DTI is used by lenders, such as mortgage companies, to help determine an applicant's ability to afford new debt. If your DTI is too high, your application may be denied.

If you are already in debt due to an MLM, it's important to get a handle on your payments quickly to avoid some of these dangers. To begin making a dent on your debt payments, follow these steps:

  1. List out everything you owe.
  2. Decide how much you can pay each month.
  3. Request lower interest rates where possible.
  4. Use a personal loan or balance transfer card to lower your interest rates.
  5. Make all of your payments on time.

Side Hustle Alternatives to MLMs

If the MLM model of spending money to make money—or, more likely, lose money—concerns you, there are alternatives that have low or no start-up costs. These flexible, work-from-home side hustles can also be good options to help you pay off any debt acquired from an MLM.

These side hustles include:

  • Tutoring online: There is a wide variety of online teaching and tutoring options to take on as a side hustle. You can tutor English for English language learners, subjects for high school or college students (generally with a degree) or design your own course in any personal enrichment subject you are interested in.
  • Freelance work: You can pick up freelance work such as designing graphics or copyediting to do some work on a flexible schedule from home.
  • Investing: Investing doesn't take a lot to get started. With many retail investing platforms, you can get started investing with just a few dollars.
  • Second-hand furniture flipping: Get creative with some second-hand flipping. By trawling free or low-cost online listings or scoring some lucky curbside finds, you can try your hand at flipping furniture.

If an MLM opportunity still sounds appealing, go into it only using money you can afford to lose—and not risking your savings or going into debt. Make sure your emergency fund and retirement accounts are funded first, and then get started treating it like any other high-risk investment. Don't be afraid to bail on the opportunity if things don't look like they're going to work out.

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