Can You Use Line of Credit to Pay Credit Card: A Balanced View

Using a line of credit to pay off credit card debt can seem like a practical solution for managing high-interest balances, but it's important to weigh the pros and cons before deciding. While it might provide short-term relief by lowering interest rates, transferring debt from a credit card to a line of credit doesn't eliminate the debt.

Instead, it shifts the financial obligation, often with different terms and repayment structures. This approach can offer advantages like lower interest but carries risks, such as potential overspending and increasing overall debt. Understanding the benefits and drawbacks is essential to make an informed decision that supports long-term financial health.

Understanding Lines of Credit and Credit Cards

Understanding the differences between lines of credit and credit cards is essential for effectively managing your borrowing options and making informed financial decisions.

What is a Line of Credit?

A line of credit is a flexible borrowing option offered by financial institutions that allows individuals to access a set amount of money as needed. Unlike traditional loans, where you receive a lump sum upfront, a line of credit lets you borrow and repay repeatedly within the credit limit.

Interest is charged on the amount you withdraw, and the funds become available again when you repay the borrowed amount. Lines of credit are often used for emergencies, home renovations, or managing cash flow, offering a more adaptable way to handle expenses over time.

How does a Line of Credit Differ from a Credit Card?

While both a line of credit and a credit card offer access to funds within a predefined limit, there are key differences. A credit card is typically used for day-to-day purchases and has a higher interest rate. A line of credit usually offers lower interest rates and is often used for larger or long-term expenses.

Credit cards often have specific rewards or cashback programs, while lines of credit tend to have more straightforward terms without added perks. The way interest is calculated also differs. Credit cards generally charge interest on any balance carried over past the due date, while lines of credit charge interest only on the amount borrowed.

Can You Negotiate Interest on Credit Cards?

Yes, you can negotiate the interest rate on your credit card with your credit card company. Many credit card issuers are open to lowering interest rates, especially for long-term, responsible customers. To increase your chances of success, you can highlight your positive payment history and credit score, or mention competitive offers from other credit card companies. Being prepared and polite can help you negotiate better terms with your credit card provider.

The Benefits of Using a Line of Credit to Pay Credit Card Debt

Using a line of credit to pay off credit card debt can offer key advantages, including lower interest rates and increased flexibility in managing payments.

Lower Interest Rates

One of the main advantages of using a line of credit to pay off credit card bills is the potential for lower interest rates. Credit cards often carry high rates, while lines of credit typically offer more competitive rates, allowing you to save on interest and pay down your debt faster.

Flexible Repayment Terms

A line of credit offers more flexible repayment options than credit cards, allowing you to make larger payments when possible, or pay smaller amounts based on your budget without the strict minimum payments required by credit cards.

Consolidation of Debt

By transferring credit card balances to a line of credit, you can consolidate multiple debts into one manageable payment. This simplifies your finances by reducing the number of payments and due dates you need to track.

Access to Reusable Credit

With a line of credit, as you repay your balance, the available credit becomes accessible again, offering ongoing flexibility for future borrowing needs. It makes it easier to manage cash flow or cover unforeseen expenses without applying for new credit.

Potential for Improved Credit Score

Reducing your credit card balances can lower your credit utilization ratio, which may positively impact your credit score. Lower credit card balances and timely payments can demonstrate responsible credit use to lenders.

The Drawbacks of Using a Line of Credit to Pay Credit Card Debt

While using a line of credit to pay off existing credit card debt can be beneficial, it also comes with potential downsides, such as the risk of accumulating more debt and facing variable interest rates or fees.

Risk of Accumulating More Debt

Using a line of credit to pay off credit card debt can free up credit on your cards, which may tempt you to continue spending and accumulate more debt. Without disciplined financial habits, this could lead to a cycle of debt, making your situation worse.

Variable Interest Rates

Many lines of credit come with variable interest rates, meaning the rate can increase over time. This unpredictability can lead to higher monthly and interest payments in the long run compared to a fixed-rate loan.

Fees

Although lines of credit often have lower interest rates than credit cards, they may still carry annual fees, transaction fees, or maintenance charges. These costs can add up and reduce the savings gained from transferring your debt.

Prolonged Debt Repayment

The flexible repayment terms of a line of credit can be a double-edged sword. If you only make minimum payments or borrow repeatedly, you could stretch out your debt repayment for many years, ultimately paying more interest over time.

Impact on Credit Score

Opening a new line of credit may cause a temporary dip in your credit score due to the credit inquiry. Additionally, if you misuse the available credit or fall behind on payments, it could negatively impact your credit score in the long term.

Key Considerations Before Transferring Debt

When contemplating using a line of credit to pay off credit card debt, evaluate your financial situation and understand the potential risks and benefits.

Interest Rates and Fees

One key reason to use a line of credit to pay off credit card debt is the potential for lower interest rates. However, ensure the line of credit's rate is lower than your credit card's, and watch out for fees like balance transfer, annual, or maintenance charges, as they can reduce the savings from the lower interest rate.

Repayment Plan

A well-thought-out repayment plan is crucial before transferring debt. Lines of credit provide more flexible repayment options, but this flexibility can also lead to procrastination, potentially prolonging your debt repayment. It's important to set a clear plan to pay off the debt, ideally faster than the minimum payment required, to reduce the amount of interest paid over time. Creating a structured repayment schedule helps ensure you stay on track and don't accumulate more debt from extended borrowing periods.

Managing Your Line of Credit to Pay Credit Card Debt

Effectively managing your line of credit when paying off credit card debt is essential to avoid falling deeper into debt and to maximize the benefits of lower interest rates and flexible repayment options.

Making Minimum Monthly Payments

When using a line of credit to pay off credit card debt, it’s crucial to manage your repayment strategy effectively. One key aspect is making at least the minimum monthly payments on the line of credit to avoid additional fees and interest.

While minimum payments can help you stay in good standing with your lender, it’s important to pay more than the minimum when possible to reduce the overall balance faster and avoid prolonged debt repayment.

Increasing Your Line of Credit Limit

If you’re considering increasing your line of credit limit, it can provide greater financial flexibility, but it’s important to weigh the potential benefits and risks.

Benefits of a Higher Limit

Increasing your line of credit can give you more borrowing power for larger expenses or emergencies, as well as improve your credit utilization ratio, which may positively impact your credit score. With more available credit, you might also avoid maxing out your current limit, reducing financial stress.

Risks of a Higher Limit

While a higher limit provides more flexibility, it can also lead to the temptation to borrow more than you can comfortably repay. This can result in higher debt levels and increased interest payments. Additionally, some lenders may charge fees for requesting a limit increase or conduct a hard credit check, temporarily affecting your credit score.

Steps to Increase Your Limit

To increase your line of credit, you’ll need to contact your lender and provide proof of income and a good credit history. Lenders are more likely to approve your request if you've consistently made on-time payments and kept your balance low. Be sure to review the terms of the new limit, including any changes in interest rates or fees.

Alternatives to Using a Line of Credit

If using a line of credit isn't the right solution for paying off debt, other alternatives such as debt consolidation programs and balance transfer cards may offer lower interest rates and better repayment terms.

Debt Consolidation Programs

Debt consolidation programs allow you to combine multiple debts into a single loan with a fixed payment plan. These programs often offer lower interest rates than credit cards, helping to streamline payments and reduce the overall cost of your debt over time.

Balance Transfer Card

A balance transfer card is another option, allowing you to move high-interest credit card debt to a new card with a low or 0% introductory interest rate. This can provide temporary relief, giving you time to pay down the debt without accumulating high interest, though it's important to pay off the balance before the promotional rate expires.

Get Started With a KOHO Line of Credit

KOHO offers a range of financial products designed to help you manage your spending, save smarter, and build credit for a healthy financial future. The KOHO line of credit is a flexible borrowing option that can help you manage short-term cash flow needs or cover unexpected expenses. With lower fees and interest rates than traditional credit products, it’s designed to give you greater control over your finances.

KOHO offers a Virtual Credit Card, a secure way to make purchases online without exposing your physical card details. It helps protect against fraud while giving you access to credit-building features. Additionally, KOHO’s High-Interest Savings Account allows you to grow your savings with competitive interest rates, making it easy to set aside money and reach your financial goals.

You can access a free credit score through the app. This allows you to track your credit profile over time and stay informed about your financial health. Monitoring your credit score regularly can help you stay on top of your credit-building efforts and ensure you’re making progress toward stronger creditworthiness.

KOHO’s Overdraft Protection feature provides peace of mind by covering shortfalls in your account up to a certain limit. This can prevent declined transactions or additional fees when your balance is low, giving you a safety net during tight financial times.