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Should you pay off your credit card with a line of credit

June 4th 2018 - by Amanda Huinink

Some people are uncomfortable with the idea of using debt to pay off debt. However, it is important to compare the difference in interest rates being charged when paying down your balance between a loan or line of credit vs. a credit card.  Often a credit card will be somewhere in the 20% interest range, while a line of credit or loan will be closer to 6% or 7% depending on your credit score and history.

First, it’s important to understand how a line of credit works.  The best way to describe it is like an overdraft. It is an on-going pre-approved loan. Funds are advanced as required up to your approved limit without having to re-apply.  Repayment is an amount equal to 3% of the balance owing. The line of credit is completely open and can be paid down or paid off at any time.

Typically, a line of credit has a much lower interest rate than a department store or bank credit card. This will reduce the amount of interest you are being charged and required to pay, making it easier and quicker to pay down the balance. Tip: Make sure not to max out your line of credit.

A second option would be a consolidation loan.  This would be a one-time loan with pre-set payments and a maturity date that would assist you in paying off all credit card debt at a much lower interest rate.  This is a good option for people who might find it too hard to have a line of credit with a revolving balance and can be stretched to the maximum at any time.  The trick with both options is to put your credit cards away and minimize their use. Keep in mind with a consolidation loan as it is harder to add on to the balance once the amount borrowed is determined.

Tips to successfully using a loan or line of credit to pay off credit cards

1)     Don’t rack up another large credit card bill. The point of consolidating your credit card bills into one loan/line of credit is to pay it off, not run it back up.

2)     Call your credit card providers to lower your limit so you are not tempted to overspend.

3)     Don’t max out your line of credit. Just because you have credit available to you, doesn’t mean you need to use it all. Save yourself money and interest by keeping your line of credit balance as low as possible.

4)     Always make more than just the minimum payment.  Paying either more frequently like weekly or biweekly, will speed up the time frame in which it takes you to pay off debt compared to paying it monthly or semi weekly.

Always remember – line of credits and credit cards are not “free money”. The interest, total balances and stress on your life can really add up in a negative way.  Talk to one of our lending specialists to decide the best option for you!