Meticulous handling of your finances can put you in a strong position even with loads of credit card debt.
You might have heard of lines of credit that can help you with finances on demand.
In this article, you will get to know whether it makes sense to use your line of credit to pay off your credit card debt.
Interestingly, you can obtain a line of credit even if your credit record is not too impressive. Visit this site to find out more about your eligibility: https://alpinecredits.ca/line-of-credit-bad-credit/.
Line Of Credit: What Is It?
A line of credit can be defined as a flexible loan that banks and different financial institutions provide you with.
With a line of credit, you would reserve the freedom to use the cash whenever you need or want.
Once you use the money, you become liable to repay the amount within a stipulated time frame.
You will also need to pay interest on the amount borrowed.
Often, your history with the bank and your credit score determine the amount you would be eligible for.
However, the interest rate for a line of credit is generally lower than what you need to shell out for credit card loans.
How Does A Line Of Credit Differ From A Credit Card?
You might have the impression that a credit card is the same as a line of credit. However, there are differences between these two sources of credit.
You can use a line of credit to pay off credit card debts.
Credit cards
With credit cards, there is no specific draw period. Therefore, one can benefit from the card so long as their account is functional with a financial institution. Many credit cards also have associated reward programs.
If you pay off the credit card dues within the grace period, you will not be required to pay any interest at all.
Credit cards happen to be the best option for managing your regular expenses if you are responsible enough while using them.
Lines of credit
On the other hand, a line of credit does not offer any of these features. When you become eligible for a line of credit, you get the provision of borrowing an amount any time you want.
However, you benefit from a significantly lower interest rate with a line of credit.
Also, getting a cash advance using a credit card will cost you more than a line of credit. With this type of credit, you always have access to the pool of funds you qualify for.
With a healthy credit score, you may be eligible for lines of credit with lower interest rates.
Benefits Of Paying Off Credit Cards With A Line Of Credit
Now, you might be wondering whether it would be a logical decision to pay off your credit card dues by utilizing your line of credit. Here are the advantages that you would gain from this transaction.
Clear All Your Credit Card Debts
When you have multiple credit card debts, you have greater financial responsibility and making each payment on time can be challenging.
However, when you acquire a lump sum through a line of credit, you can clear off all the dues at once.
This may provide some relief, knowing that you have a single payment to make each month, rather than multiple.
Therefore, there’s a lower chance of missing out on a payment date that could tarnish your credit score.
Enjoy A Lower Interest Rate
Apart from consolidating your debts with a line of credit, you can also benefit from a lower interest rate.
While the average interest rate for credit cards is around 20% annually, you can avail of lines of credit with interest rates ranging from 6% to 8% per year.
When you channel these savings to pay off the principal amount, you eventually end up repaying the line of credit much faster.
Risks Of Paying Off Credit Cards With A Line Of Credit
Obtaining a line of credit to pay off credit card dues comes with its own risks:
Ending Up In A Debt Cycle
You might end up compromising healthy spending habits once you have consolidated your credit card debt. Eventually, failing to make timely payments on your line of credit will land you in a debt cycle.
Messing Up Your Credit Score
Given that most lines of credit are unsecured loans, they impact your credit score. On top of it, if you miss out on timely payments, your credit score slumps.
This will put your financial credibility at stake, complicating prospects of obtaining any kind of loan.
When Should You Be Using Line Of Credit To Pay Off Credit Card Debts?
If you know that your income will be unstable in the coming months, it doesn’t make sense to obtain a line of credit to pay off credit card debts.
Regardless of where your debts are, you are likely to default. Besides, the creditor might claim the collateral if you default on a secured line of credit, like your home.
A line of credit would not be suitable for you if you want to spend the amount on your daily expenses and vacations.
However, it would be a favourable decision if you want to lower the interest rate by consolidating your credit card dues.
Endnote
If you have outstanding credit card dues, you might look for a line of credit.
Once approved, you can settle the debts and focus on clearing the line of credit loan by making a single payment each month.
However, if you have a poor credit score, you might be worried about your eligibility for lines of credit.
Seek professional help from experts to qualify for a line of credit, which can ease up your finances significantly.