If you're thinking about using line of credit to pay off credit card debt then you need to first figure out if this is the most financially advantageous decision for your situation. Although it can be a feasible idea for some people, this can be the beginning of a dangerous financial situation fraught with more debt than ever.
Lines of Credit
Lines of credit are extended to people by lenders in many different forms. Homeowners commonly turn to equity lines of credit to consolidate credit card debt, but unsecured lines of credit are also available from many lenders.
Equity Lines of Credit
An equity line of credit is a revolving account utilizing the equity in your home. The interest rates of equity lines of credit are often quite attractive, and many homeowners find the possibility of a tax deduction on paid interest quite alluring too.
Homeowners who have substantial credit card debt may want to consider an equity line of credit as an alternative to consolidating with a higher interest loan. Consumers must always take caution, however, to not use the equity in their homes frivolously. Declining market values can develop into a negative equity situation for those homeowners who max out their lines of credit to pay off credit card debt.
Unsecured Lines of Credit
Unsecured lines of credit offered by banks and other lenders are similar to credit cards, except the account holder is given a book of checks to use for purchases and to pay off debts. Some banks and credit unions automatically attach lines of credit to checking accounts for customers with good credit to use for overdraft protection. Many people like having a line of credit available as a safety net in case of a financial emergency.Unsecured lines of credit can sometimes feature relatively high interest rates and fees. This can be a smart move if the interest rate and fees do not exceed the interest rate and fees of the credit cards you want to pay off. Many people find that reducing their debt to one payment helps them focus on paying the debt down.
Using Line of Credit to Pay Off Credit Card Debt Cautions
Consolidating several credit card accounts into one payment can streamline finances and save plenty of money in interest charges as long as the line of credit features a low interest rate. It isn't a magical solution, however, and caution must be used to make sure that the consolidation won't result in a worse financial situation.
- Watch the fees on a line of credit. Many lenders tack extra fees onto lines of credit, so even though the interest rate may be lower, you may wind up paying even more in the long run because of the fees.
- Don't keep using your consolidated accounts. Too often, consumers fall into the trap of consolidating their debt into a lower interest account, but then make the mistake of using the very credit cards they paid off. They may start slowly, but eventually they find that their credit cards are maxed out again in addition to using line of credit to pay off credit card debt.
- Change your behavior. Examine what got you into so much debt to begin with, and then stay away from those behaviors. For example, if impulse shopping contributed heavily to your debt, consider this your fresh start toward financial responsibility and don't allow yourself to fall into the same old habits of shopping for things you don't need.
Alternatives
Many financial experts suggest that the best way to get rid of credit card debt isn't to consolidate it, but instead to systematically and aggressively pay the accounts down. You might also consider consolidating all the credit card debt onto one credit card, as long as that card has a low interest rate. Whatever method you choose, stick with it until you can proudly proclaim zero credit card debt.
