It might seem contradictory to use debt to pay off debt, but taking out a line of credit to pay off credit card debt can be a great financial decision.
Because you can usually get a line of credit at a lower interest rate than your credit card, using a line of credit to pay off credit card debt can reduce your total interest costs and reduce the amount of time you’re in debt.
Should I pay off my credit card with a line of credit?
You definitely should explore taking out a line of credit to pay off your credit cards if the following is true:
- You are carrying $5,000 or more in credit card debt
- Your interest rate on your credit card is greater than 12%
- You have a good credit score that could help you qualify for a line of credit with an interest rate below 10%
- You’re disciplined enough to follow through with your debt repayment plan once you consolidate your head
If the above sounds like you, read on!
How to take out a line of credit to pay off credit card debt
It’s usually easiest to get a line of credit from your primary bank. They’ll ask for a paystub or last year’s Notice of Assessment to verify your income, and also run a credit check.
To qualify for a low-interest line of credit, you want to have the highest credit score possible, and for your credit report to be free of any errors or debts in collections. If you’re not sure where you stand, you can check your credit score and get your credit report for free.
Ideally, you want to get a line of credit to pay off credit card debt that has two things:
- a limit greater than the total amount of credit card debt you owe. So if you have 4 credit cards with balances of $2500, $3400, $600, and $7000, you’ll need a line of credit with a limit of at least $13,500 to consolidate your debt.
- an interest rate at least 5% less than your credit card interest rate. If you can get a line of credit with a single-digit interest rate (<10%), then that’s excellent, but any interest rate below the average credit card interest rate of 20% will help you out.
Benefits of using a line of credit to pay off credit card debt
The are many benefits of paying off your credit cards with a line of credit. Here are the main perks in detail!
Reduce the carrying cost of your debt
This is the main reason it’s great to use a line of credit to pay off credit card debt. Typically, lines of credit have much lower interest rates than credit cards, which will reduce the overall carrying cost of your debt.
For example, a $5,000 balance on a credit card at 20% will cost you $1,000 per year in interest. On a line of credit of 6%, the same balance it will only cost you $300 in interest. The $700 you save not paying interest can help you actually make a dent in your debt and start paying it down.
To qualify for the lowest interest rate possible, you need to have the highest credit score possible. You can check your credit score and get your credit report for free with Borrowell.
Reduce the amount of time you’re in debt
Reducing the carrying cost of your debt not only lowers the total amount you pay, it gets you out of debt faster.
If you’re making payments of $150 per month towards your $5,000 debt, on a credit card at 20% it will take you almost four and a half years to pay off.
On a line of credit at 6%, the same $150 payment against the same $5,000 debt will get you to debt-free after only 3 years.
However, to actually reap the benefits of using a low-interest line of credit to manage your credit card debt, you have to avoid racking up new debt on the credit card once you pay it off.
Have only one payment to make each month instead of multiple
Another benefit of paying off your credit cards with a line of credit is you’ll only have one payment to grapple with each month. If you were carrying a few balances on a number of different cards, you had many minimum payments and bill due dates to worry about. Now with all your debt consolidated on a line of credit, you only have one!
How to properly consolidate your credit card debt to a line of credit
Once you’re approved for a line of credit and you’ve used it to pay off your credit cards, you still have work to do.
Now it’s very important to make sure you actually pay off your debt, and you avoid taking on any new debt. Here are some ways to protect yourself… from yourself!
Lower your credit card limits
The best way to protect yourself from ever finding yourself in the situation you’re in ever again is is to lower the limit on your credit cards.
If your credit limit is $5,000, call your bank and have it reduced to $2,000. This is enough of a credit limit to enjoy the convenience of a credit card, without putting yourself at risk of accumulating a debt balance that you can’t pay off.
Stop using credit cards
The other step you can take is to stop using the credit card entirely. Leave it at home when you go out, and only use cash or your debit card to make purchases.
It might seem extreme to give up using a credit card, but it’s worthwhile to spend the next few months learning how to live comfortably within your means so you’re not tempted to use credit to fill the gaps in your spending again.
Credit cards are awesome for convenience and rewards, but you can get all the perks without any of the pain if you use my favorite budgeting & saving tool, KOHO. KOHO works like a prepaid Visa card, which means you can use it anywhere Visa is accepted, but you can’t actually spend money you don’t have. The best part? You can earn up to 2% cash-back on every dollar you spend.
Don’t max out your line of credit
Banks are overly generous with credit, and it’s because doing so benefits them, not you. Do not borrow more than you need.
If you’re offered a $25,000 line of credit but only need $10,000, then decline the rest. You only want to use a line of credit to pay off credit card debt, not add to your debt!
Once you have your line of credit, do not rack up the entire limit.
Just because you have credit doesn’t mean you have to use it all. In fact, keeping your debt balances low and leaving yourself with lots of available credit is a great way to boost your credit score.
Related post: 5 Easy Steps To Build Good Credit
Always make more than the minimum payment
Always make the effort to make more than the minimum monthly payment on your line of credit, even if the interest rate is so tantalizingly low you’re certain you can carry the debt forever without any real consequence. Being in debt a second longer than you have to is always bad.
Remember, credit is not “free money” and even small balances can be difficult to pay off, so approach any with caution.
However, when used responsibly credit can be a powerful tool to help you achieve your financial goals, and shouldn’t be avoided. Particularly when it can actually help you get out of debt faster!
Follow your debt repayment plan
Paying off debt isn’t easy, and consolidating high-interest debt to a low-interest line of credit card is only one step in the right direction.
You need to commit to your debt repayment. Whether you’re using the Debt Avalanche or the Debt Snowball or some other method, paying off debt is a marathon, not a sprint!
If you need extra help, use a free tool like Undebt.it to get you to debt free faster.
Oh man, I wish I had this post a year ago. Eventually I figured out that the lower interest rate on my line of credit might be helpful to me, so this was the first step I took in taking control of my credit card debt after a while of sitting on it and dutifully paying into that black hole. It worked well for me, but I think it was only a success because I followed the steps you listed here – I stopped using my credit card, I didn’t add anything new to my line of credit and I put every extra penny I had towards the payments so I was never paying “just” the minimum. It’s a useful tool to help manage debt, but only if it’s done the way you’ve outlined and if people are disciplined in how they use it.
Awesome post. While I haven’t ever held credit card debt a lot of my friends over the years have. This would have been super useful to them when they were struggling if they had these tools and resources. Hopefully you can help the next generation 🙂
Lines of credit have been a useful way for me to lower my borrowing costs. I try not to abuse this though. Keeping a low balance on both and making sure to pay off my LOC in a timely manner. I generally don’t like interest expense unless it is for an investment and even then I would proceed with caution.
Great advice! Like you say, the key is to ensure not to just transfer debt to a lower interest rate facility, but to also make extra repayments and lower the limits. So many people transfer the debt, get excited about paying less interest and end up maxing the other loan!