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  • Is it Smart to Pay My Credit Card Debt with a Line of Credit?

    Is it Smart to Pay My Credit Card Debt with a Line of Credit?

    Jean Riddell

    When you’re carrying high credit card balances, interest on those monthly bills can build up faster than you can say APR (annual percentage rate). That's why some people might consider getting a line of credit to pay it all off rather than continue to make monthly payments. But getting a line of credit isn't always possible, and it might not be the best choice for some.  

    While making minimum payments barely makes a dent to your debt, if you do miss a payment, your interest rate can skyrocket. In this situation, many people might look at ways to shift money around, such as using one credit card to pay for another, but this is rarely (if ever) a successful strategy. However, there is another option: taking out a line of credit.

    You might be thinking, “Isn’t it counterproductive to pay off debt by taking on more debt?” Not necessarily. If you’re able to secure a personal line of credit at a lower interest rate than what you're currently paying on your credit cards, it could be a very savvy financial decision. And, unlike a home equity line of credit (HELOC), a personal line of credit requires no collateral; that’s the good news. The bad news is that personal lines of credit are based solely on your credit score, and unfortunately, many people struggling with debt may not have such a stellar score. If you have accounts in collections or you are consistently late in making your monthly payments, you’re likely to be denied a personal line of credit. But if you’ve maintained a good credit score and you can qualify for a line of credit, here’s how it works and why it might make sense for you.

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    What is a Personal Line of Credit?

    A personal line of credit is a predetermined loan that allows you to spend up to a certain amount. Unlike regular loans, there are no interest charges until you begin using it. Most people acquire personal lines of credit through their primary bank, which will verify your employment, income, and other financial factors, in addition to running a credit check to determine if you qualify. The higher your credit score is the lower your interest rate will likely be. If you are able to secure a personal line of credit, you can use as much of it as you want, and pay back any amount you want, as long as you make the minimum monthly payment, which is usually a combination of interest and principal.

    How Much Credit Can I Get?

    Most personal lines of credit range from $5,000 to $50,000, but if you qualify for more than your current debt load, don’t give into the temptation! Only take out a line of credit for the amount of your total credit card debt. So, if you have three credit cards and you owe $10,000, $7,000 and $3,000 on them, try to acquire a personal line of credit of no more than $20,000 to pay those credit cards off in one fell swoop. Then you can focus on simply paying back the personal line of credit.

    What is the Interest Rate on a Line of Credit?

    Aside from consolidating your debt, this is where a personal line of credit can really pay off. Lines of credit usually come with a significantly lower interest rate than credit cards. You might even be able to get a line of credit with a single digit percentage interest rate versus the average credit card rate of nearly 20%. It’s important to note, however, that interest rates for lines of credit are variable, meaning they change depending on the bank’s prime rate. So, if you borrow when rates are low, it can come back to bite you if the rates go up by the time you start repaying. Therefore, if the difference in interest rate between your credit cards and a line of credit is less than 3%, it might not be worth it.

    A Word of Caution

    I’ve seen clients where they got a personal line of credit to pay off their credit card debt, but then racked up charges on their credit cards again, leaving them in a much worse predicament. Not only do they have to pay back the personal line of credit, but also the new charges on their cards. So if you are able to secure a line of credit, end the spiral of debt and put away the credit cards!

    Denied a Line of Credit?

    Again, many people struggling with debt have a spotty credit report and a low credit score, which makes it next to impossible to secure a line of credit. But, there are other options, such as a Debt Consolidation Program (DCP) through a non-profit credit counselling agency, like Credit Canada. With a DCP, your debts are rolled into one monthly payment and a certified credit counsellor will negotiate with your creditors on your behalf to stop or reduce interest charges. They will help you pay off your debt over time while teaching you valuable money management skills to keep you living debt-free for good.

    If a DCP sounds like the right fit for you, or if you just need some advice regarding your debt, the experts at Credit Canada are just one phone call away. Our debt counselling sessions are 100% free, confidential, and non-judgmental. Just call 1.800.267.2272 to book! You'll get all the information you need to make the best decision for you and your financial future.

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    Topics: Credit Cards

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