Using a Line of Credit to Pay Off Credit Card Debt
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 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.
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 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.
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.
Credit Card Debt Tips – If Your Credit Card Debt is Over $10k You Need to Consider a Settlement
There are millions of people, who are right now going through critical and annoying financial crises. Their life has become a living nightmare, for they are not able to deal with the current situation. Recession is the main reason, due to which people have got in this problem. People, who have been using credit cards, they are suffering the most of it. Consumers are failing to pay off their outstanding bills and it has not only made them tensed, but the credit card companies are also facing significant loss. People, who are living in developed countries, even they are facing the same problem. Credit card debt is increasing, by each passing day.
This is the right time, when a solution has to be given to both the parities. Being a debtor, you just need to show a responsible behavior and you should at least take a step, in order to deal with your debt. You can get highly workable and affordable credit card debt tips. You can get these tips from debt settlement firms or from your creditor as well. First of all, you need to decide that you want to eliminate the debt, then go and talk to your creditor. Tell him about your problem and he will design a payment plan for you. In this way, you will start paying off your outstanding bill in small and interest free installments. It will protect you from bothering and annoying calls of your creditor. Once your lender will start receiving money from your side, he will not bother you.
Another option is to involve a debt settlement firm, which will play the role of a third party and will help in settling the issue between you and your lender, in the most amicable way. You will get to know some really workable and helpful tips, which will protect you from any kind of problem in future. The best way to deal with your credit card bills or debts is to make a list of all your cards. You should always pay, at least the minimum amount, each month, but the card with the highest limit should always be given preference, in terms of paying the bills. Try to pay some buck extra than the minimum amount. In this way, you will not get into the trouble because of increased interest rate on the outstanding amount. These credit card debt tips will surely work out for all the consumers.
If you have over $10,000 in unsecured debt it may be a wise financial decision to consider a debt settlement. Due to the recession and overwhelming amount of people in debt, creditors are having no choice but to agree to debt settlement deals.
How Does Credit Card Debt Affect Your Credit Score?
Credit card debt is often considered one of the most dangerous types of debt, because it’s consumer debt that isn’t tied to any asset (unlike a home or car) and therefore comes with a relatively high interest rate.
It also tends to come with higher than normal fees, overages charges and other traps that keep you in debt to the credit card companies longer. You don’t have nearly the amount of control over credit card debt that you do with some other types of debt.
So how does credit card debt affect your credit score? Let’s take a look at the important factors.
There are five factors that make up your credit score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit (10%)
- Credit type (10%)
As you can see, payment history is the biggest factor when determining your credit score, but the total balance you owe makes up the next biggest contributing factor. Which means, if you owe a lot of money on your credit cards — and exceed the target minimum (more on that below) — it’s likely that your credit score will be negatively affected.
To maintain the correct credit-to-debt ratio or target minimum, you should never utilize more than 30% of your total available credit on any one credit card.
For example, if you have a card with $1,000 credit limit, you don’t want to charge more than $300 each month (or 30%) to keep your credit-to-debt ratio intact. It’s important to do this whether or not you pay off the balances every month, because charging more than 30% of your limit will cause your credit score to decrease.
That 30% target is the minimum you should aim for and if you can pay your credit cards off entirely, that’s even better! But you never want to charge more than 30% of the credit card balance if you want to maintain a high credit rating.
Once your credit utilization goes above 30%, then your credit score will likely begin to drop — not a lot at first, but a little. And if your credit utilization starts to approach 100% of your available credit then your credit score will likely suffer quite a bit.
Banks want to see a potential lender who regularly pays interest and continues to make progress on reducing the principal. Having credit card debt can be a good indicator of whether the lender can approve the debt you’re requesting.
So in essence, having some kind of debt — whether it’s credit cards, student loans, or a mortgage — can help service other debt you’re trying to consolidate or pay off. Essentially your credit score is a determination of your ability to take out debt and then repay it, meaning it’s more of a debt score indicator than anything else.
In a sense, it’s true that having a credit card (or a few credit cards) can help your credit score. However, and this is a big however, getting buried in debt is never good for your credit score. So nobody should go out and get a credit card if they think it will cause them to fall into debt.
Exceeding your credit-to-debt ratio can cause your credit score to go down. But the even greater damage to your credit score can come from failing to make your payments on time every month. Since your credit score is basically a measure of your likelihood of paying back a loan, missed payments or late payments are signals that you might not be as likely to pay back a loan and for that reason they hurt your credit score. The fact is, one late payment can hurt your credit score. We’ve previously written about what happens if you don’t make your credit card payments, and that post gives you a very detailed look at the potential impact on your credit score.
You should also know that although we talk about your “credit score” as if it is one solitary score, the reality is you have many different credit scores. That’s because there are three major credit bureaus — Experian, TransUnion, and Equifax — that each compile credit reports and provide their own unique credit scores to lenders.
While each of these credit bureaus generally provides a score that is within a similar range as the other two bureaus’ scores, there are rare cases when the scores vary wildly and in those cases you need to find out the cause of the variation (which may be credit fraud or simple error) and try to address it.
Furthermore, each credit bureau has a range of different credit score “types” that they provide to lenders in situations where a consumer is applying for a mortgage, applying for a car loan, or applying for a credit card. Which means your credit score for a mortgage application is often different than your credit score for a car loan application, and so on. These credit scores pretty much all range from 300–850, though, so if you can keep your score in the 700’s or even 800’s you’ll be in good shape.
Because, if your intent is to get out of credit card debt completely, and not worry about the “debt score”, I’d suggest using the ReadyForZero app to make a plan. Then interact with the community here on the blog to help keep you motivated.
Your credit rating is only one part of what decides whether you get approved for a loan, and credit cards are only a part of the credit rating. So don’t worry too much about having credit card debt in relation to your credit score, unless you’re planning to take out more debt in the near future. Hopefully this post helps you understand how credit card debt affects your credit score. If you have more questions, ask us in the comments below!
This post was published by Carrie, Guest Blogger for » ReadyForZero. ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.