Is your credit card debt keeping you up at night? While it is common for individuals to carry some credit card debt, it can however become too much for them to manage, raising rather significant financial concerns that can lead to extreme debt and a very bad credit score.
If this is position you find yourself in, then you may want to try and find methods of paying down this debt. One such method of paying down your debt can be to consider applying for a line of credit. While this can be in many cases an effective course of action for borrowers, there may also be times when it is not the best decision.
If you are at a crossroad like this, it is a good idea to examine the pros and cons associated with taking out a line of credit in order to pay off your credit card debt.
The way that a line of credit differs from other types of loans is that a line of credit can be used to pay off a variety of debts not just one, for example in the case of a mortgage, where the loan is used with the sole purpose of paying for your home. In this respect, a line of credit can be an effective tool to pay off your credit card debt.
With that being said, please read on to determine id using a line of credit to pay off your credit card might be right for you.
The Benefits of Paying off Credit Card Debt with a Line of Credit
Lower Interest Rates
In many cases, lines of credits will typically have lower interest rates than your credit cards will. Therefore, you can reduce the amount of debt you have more effectively since you do not have to deal with paying as much interest each month.
To help illustrate the difference between the two interest levels, if you have a credit card with a 20% rate on a balance of $5000, you are looking at paying around $1000 in interest each year. On the other hand, if you are using a line of credit with a 6% rate to pay off your credit card balance of the same amount, the amount of interest you will have to pay over the course of the year will only amount to approximately $300.
In the end, a lower interest rate can help you pay off your debt a lot faster since you are not fighting a constant battle with paying as much towards interest.
Automatic Payment Withdrawals
Many lines of credits will also be set up to include biweekly or monthly payment withdrawals. Implementing these automated payments can help borrowers stay on track and continue to steadily pay off a significant chunk of their debt.
If you have previously only been paying off your minimum credit card balance once a month, you may not actually be paying down much of your debt. In fact you are likely to only be paying off the interest, not the actual principle balance itself.
On top of that you may have missed a payment here and there, which can have negative implications for your credit overall. Therefore, by having automated payments in place, this can ensure you never have to worry about missing a payment – and of course, your balance will continue to go down at a more steady and effective pace.
You Have a Steady Income
Lastly, if you have both a steady and sufficient income coming in each month,
this will mean you are more likely to be able to continue to successfully pay off your line of credit. If you know you can keep up with the demands of paying off your line of credit without defaulting on any payments or the entire size of the loan itself, then a line of credit can surely be an advantageous way to pay off your credit card debt.
What to be Cautious About When Using a Line of Credit to Pay off Credit Card Debt
Examine All of the Fees
While some credit lines will certainly offer lower interest rates, there are sometimes additional fees that cause the overall cost to be higher. In terms of fees, there will sometimes be application fees, annual fees, and registration and property appraisal fees associated with secured home equity lines of credit.
While this is not always the case, it is best to be aware of these fees before moving forward with your line of credit. If these fees are too high, it could be detrimental to your ability to use the loan to pay off your credit card debt after all.
You Will Continue to Overuse your Credit Card
If you are continuing to use your credit card too much, even maxing it out – this will also continue to be a problem. If you have secured a line of credit comparable to the amount of your credit card debt, this is just enough to pay it off without creating a lot more credit card debt. While it may still be necessary to continue to use the card from time to time, it is best to try and use it less frequently in order to successful pay off this debt.
It is best to be cautious when using your credit card after finally paying it off, because you will not only be having to pay off the line of credit you will also be in the position of having to also make higher credit card payments each month as well.
Before entering into a line of credit agreement make sure you know you can reduce your credit card use – or the line of credit won’t actually end up being all that beneficial to you.
You Don’t Have Steady Income or Equity/Assets
While it is true that you are more likely to be approved for a line of credit if you can prove you have steady income coming in, you still want to be aware of this reality. Should you be granted an unsecured line of credit and you don’t know if you will have the financial resources to continue paying it back, then perhaps moving forward with the line of credit is unwise.
If it is a secured line of credit you are seeking, in the form of a home equity loan, you will only be eligible if you have enough equity in your home. That being said, you will still want to be cautious before taking on this type of line of credit since your home itself is being used as collateral. Should you default on these payments, you could risk losing your home in the process.
While taking out a line of credit to pay off your credit card debt can certainly be beneficial in many ways, each borrower should still take pause and examine both the positive and the negative scenarios that this type of loan arrangement.
Before moving forward with a line of credit, think about your finances and your personal situation and decide if it is right for you in the long run. That being said, if you are struggling to pay off your credit card debt and a line of credit is a suitable option, then this can give you the peace of mind you need to finally see that light at the end of the tunnel and the opportunity get rid of a significant amount of debt.