Monday, 17 January 2022

Should I use a Line of Credit to pay off Credit Card Debt?

Should I use a Line of Credit to pay off Credit Card Debt?
12 Aug

Hi guys, Bridget from Money After Graduation here and today I'm answering a reader question that I received on Twitter Emily writes, "Hey Bridget, I have a financial question for you

I have $5,000 in credit card debt from getting a credit card right when I turned 18 and being incredibly irresponsible with it The last 2 years of my life have been a mess trying to pay off this credit card debt while also trying to pay for school I am a year and a half into my four-year degree and I've completely run out of savings And I'm still carrying around this $5,000 of credit card debt I met with someone at my bank and he suggested I take out a student line of credit for $20,000, pay off all my credit card debt and pay my tuition

The interest on the line of credit is better than that on my credit cards, but I'm nervous about opening a line of credit to pay off credit card debt I'm confused about where I should go from here and would love to hear your input!" This is a great question and it's a really common one for students I actually found myself in the exact same situation when I was in my third year of university, and I took out a $16,000 line of credit to help manage my costs and my debt at that time The short answer is YES, taking out a student line of credit to pay off your debt and afford your school fees can be a sound financial decision Lines of credit typically have much lower interest rates than credit cards, which will lower the carrying costs of you debt and help you get ahead on actually paying it down

$5,000 of credit card debt at 20% is costing you $1,000 per year in interest On a line of credit at only 6%, that same balance will only cost you $300 per year in interest That's a savings of $700, which can go a long way in actually paying that debt down What's really important is once you pay off your credit card debt is that you don't rack it up again One of the easiest ways to protect yourself from doing this is to lower the limit on that card

Instead of keeping it at $5,000 maybe lower it down to $2,000 This is enough for you to still enjoy the convenience of having a credit card without putting yourself in danger of racking up a debt balance that you struggle to pay off The other thing you can do is to stop using your credit card entirely This means when you go out, leave your credit card at home and only use cash or debit to make your purchases This might seem like an extreme step but you have to develop the habit of living comfortably within your means without using credit to fill the gaps in your spending

The other reason you should say yes to this line of credit is you need to pay your tuition Your education is important, and carefully borrowing the money you need to finish your degree is a worthy investment in yourself and your future earning potential I know that after feeling haunted by a $5,000 debt balance, taking on a $20,000 student line of credit can seem terrifying, but you don't have to use up the entire limit If you have an income, make an effort to make more than the minimum payment towards your line of credit balance while you're still in school This ensures that you'll graduate with the smallest amount of debt possible, and you'll be way better off because of it

As you've learned, credit is not free money! And even small balances can become very difficult to pay off So approach credit with caution, but still take advantage of it if it helps you reach your financial goals Thank you so much for your question Emily! I hope you guys enjoyed this video and learned something from it If you did, please give it a thumbs up and subscribe to my channel If you have any questions that you would like me to answer about your personal finances, feel free to shoot me an email at [email protected]

com I will see you next week!

Does a Debt Consolidation Loan Hurt Your Credit banner
Amazon Prime Rewards Visa Signature Card

Amazon Prime Rewards Visa Signature Card

« »

Related Articles