CAN DEBT BE CONSOLIDATED USING A CREDIT CARD?
When paying off debt from several accounts, it may be wise to consolidate it into a single account. This assists you in paying off your debt faster by allowing you to make a single, monthly payment at a lower interest rate. It is usually consolidated through secured loans, like a house or car, but debt consolidation can also be done using a credit card.
Lianne Lutz, founder of Women’s Wealth, a wealth coaching and financial consultancy for women, said that, “Debt consolidation using a credit card is a debatable issue and would depend entirely on the individual’s financial situation.”
She thinks credit card consolidation is a smart option if someone has cash available to pay the interest each month, as well as some capital.
Lutz suggested that you first establish how much debt you have, and how much you can realistically pay off per month.
Following this she said, “It would be most effective to research financial institutions in order to find credit card plans with the lowest interest rates.”
However, in the future this can affect your credit score.
Kerri Lutz, daughter of Lianne and partner of Women’s Wealth said: “If you have to consolidate all your debts onto one card, you will probably end up having a high utilization rate, therefore lowering your credit rating.”
The utilisation rate is calculated as the ratio of the balance on a card to the ratio of its limit on that card.
“One way of overcoming this, is to request for a higher limit on the card – in order to consolidate and still have a good credit rating,” she added.
Winnie Kunene, money psychologist and personal finance TV personality, is a little more wary of consolidating debt using a credit card.
Kunene warns: “You’re still standing the risk of getting back into the temptation of creating more debt.”
“Nonetheless, if somebody truly trusts themselves and they are highly disciplined, then they can do it,” she said. She recommended that the credit card debt gets paid off quickly through paying the above the usual monthly minimum.
If you are willing to take the risk of consolidating your debt on a credit card, do the following:
a) Get a statement from each of the companies you owe money to. From that make a list that consist of: name of financial institution, balance owed, minimum amount payable per month and interest rate.
b) Find out if your credit card provider offers a better rate than all of the above lenders. Find out from your provider how much you’d need to repay in instalments if you consolidate your debt using your credit card.
c) If your credit card provider offers better rates and payback options, pay off your debt with your credit card.
Do not take on any more debt until your credit card is paid off.
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Until next time,
The MoneyShop.co.za Team