26 Jun Can I Pay Off Debt with a Credit Card?

Have you ever thought about paying off debt with a credit card? You can pay off debt with a credit card, but it depends on how high your credit limit is, how much of a balance you have accrued, and how much you’re willing to pay in interest.

You might want to pay off debt with an existing credit card if you’re hesitant to take out another loan or don’t have a good enough credit score to take out a loan. Using a credit card to pay off debt is a lot like taking out a consolidation loan, except credit cards have higher interest rates than consolidation loans (and personal loans in general).

Credit Cards vs. Consolidation Loans for Paying Off Debt

Here are some reasons why you might consider paying off debt with a credit card versus with a consolidation loan.

Credit cards

If you have a high credit limit, using an existing credit card to pay off debt could be an alternative to taking out new credit. However, it might not be a great option for people with a lot of debt and will only work if you can afford to pay off the card you’re planning to consolidate other debts with.

It could work well if you haven’t used a lot of the card’s limit and don’t have too much debt to consolidate.

For example

Lisa has a Capitec credit card with a limit of R100 000 and debts worth R20 000. She’s only used R10 000 of credit on the Capitec and decided to pay off all of her store cards and small loans at once using the Capitec card.

Her other debts are paid off and she can cancel some of her store cards. Her credit utilisation ratio is below 30%, keeping her credit score high. Her credit score increases when the next billing cycle happens. She pays R3000 per month to her Capitec credit card, and is debt-free by the end of the year.

Of course, this is the best-case scenario.

Using a credit card to pay off debt would not work if your balance is already high and and you plan to pay off debt with it.

An example of where this wouldn’t work

John has a Capitec credit card with a limit of R100 000 and a combined debt of R50 000. He has used R50 000 on the Capitec credit card. He pays off debt with the credit card, but has now maxed out his Capitec card.

He makes minimum payments on the credit card. His credit score drops because of his high balance on one card and high utilisation rate. If an unexpected expense arises, John has no revolving credit left and his credit score is too low to take out a loan.

Consolidation loans

A consolidation loan is a personal loan taken out that pays off many debts at once or consolidates them. They have lower interest rates than credit cards and lower monthly payments because you can spread the payments out over a longer period.

Let’s replay John’s situation, substituting using revolving credit with a consolidation loan.

John has a Capitec credit card with a limit of R100 000 and a combined debt of R50 000. He has used R50 000 on the Capitec credit card. He decides to take out a consolidation loan. He uses the loan to consolidate his debt, then pays lower monthly payments because the payments are spread out over 3 years instead of a few months.

Using a consolidation loan to pay off debt afford peace of mind, lower interest rates, and lower monthly repayments. Contact Debt Refinance today for assistance with a consolidation loan.