Is Paying Off Credit Card Debt with a Line of Credit Wise?
Paying off credit card with a line of credit may seem like a contradictory, similar to favourites like ‘an exact estimate’, ‘original copies’, or ‘act naturally’.
But paying off debt via wallet plastic can actually be a shrewd financial maneuver. A line of credit can reduce the carrying cost of your debt, facilitating not only a lower total amount you need to pay, but expedites your get-out-of-debt plan.
Here’s how you can pay off credit card debt with…more credit.
Decreasing the carrying cost of debt.
Depending on your credit card and credit score, the interest rates for your cards may be high. Generally, lines of credit offer much lower interest rates than credit cards, reducing your overall carrying cost of debt.
For you visual learners, here’s a tangible example:
A credit card with a $5,000 balance at a 20% interest rate adds up to $1,000 annually in interest. In comparison, a line of credit – say at an easily-attainable 6% – will only generate $300 of interest in the same time frame.
That comes to $700 lost to a higher interest on your credit card, which could be productively allocated to actually paying down your debts.
Not only will you lower the total amount due debt-wise, you’ll pay everything off faster, too.
Using the same figures, let’s say you’re putting $150 per month towards your original $5,000 debt. With the same credit card at 20%, that equates to four and a half years until your credit card debt is fully repaid.
On a line of credit at 6%, that timeline accelerates to three years until the slate is wiped clean.
Now, utilizing a line of credit to pay off credit card debt is only plausible if you aren’t racking up new debt on your card, especially after you’ve paid all your debts off. The best way to manage credit card spending is through lowering credit limits and steering clear of maxing your line of credit.
Lowering credit limits.
This might be the best way to err from sinking into credit card debt again. If you’re constantly struggling to stay below your credit threshold, minimize your maximum as much as possible.
Can’t stay disciplined with $5,000 a month? Ask you bank or credit card company to lower it to $3,000 or so.
Remember, you only need enough funds to enjoy the convenience of credit; anything extra just increases your risk of accumulating an unpayable balance.
Avoid maxing lines of credit.
There’s a reason banks are trigger-happy when it comes to dishing out credit – it’s highly beneficial to a certain party (hint: it’s not you). Credit card companies and banks are frivolous with credit, since they don’t want you to pay everything on time – they’d rather have that interest build up, meaning more green in their pockets, and less in yours.
Don’t borrow more than what’s needed. If you only need a $15,000 line of credit, and you’re offered $25,000, simply decline excess credit. And just because you have available credit, doesn’t mean you need to use the entire amount; keeping debt balances low, and leaving available credit when needed is fantastic way to improve your credit score.
Credit isn’t ‘free money’. But, when used responsibly, it can be a powerful facilitator in achieving your financial goals, or one of the best ways to pay off debt!
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