Does it make sense to use a line of credit to pay off credit card debt?

Should I transfer credit card debt to a line of credit?

A line of credit might be a good option for you to tackle your credit card debt, Nicole. Lines of credit typically have significantly lower interest rates than credit cards, and this can certainly save you money in interest payments and allow you to pay off your debt more quickly. 

While average credit card interest rates sit at around 19.99%, interest rates on lines of credit currently range from about 4% to 10%, depending on the lender, your credit history and the type of credit line (secured or unsecured). Note that lines of credit typically have variable interest rates, so when the lender’s prime rate increases, so will the interest charges on the line of credit. 

But a line of credit isn’t a one-size-fits-all solution for all credit card debt. 

To start, you may not be eligible for a line of credit—especially if you have a low credit score or a history of bad credit. And, depending on how you use it, a line of credit can impact your debt-to-income ratio and credit utilization rate, which may not be ideal if you’re planning to take out a mortgage or personal loan in the near future. 

If you meet all the following scenarios, however, a line of credit might be the right option for you. 

You’re not eligible for a credit card balance transfer or lower interest rate

Before taking out a line of credit to tackle your credit card debt, talk to your bank or credit card company to see if you can negotiate a lower interest rate. You could also look into a credit card balance transfer to a lower-interest-rate card, but take note that the lower interest rate is usually temporary—so be sure to find out when that introductory rate ends. 

A credit card balance transfer or renegotiated interest rate on your existing card can be better solutions for those who aren’t disciplined with their spending, as these options won’t increase your risk of going deeper into debt, as may be the case with a line of credit. 

You’re eligible for a line of credit

To qualify for a line of credit, you typically need: 

• Minimum household income of $35,000 to $50,000;
• A credit score of around 660 or higher;
• Collateral, if it’s a secured line of credit.

A lender might not offer you a line of credit if:

• You’re behind on existing debt/credit card payments (which can be tough if that’s why you want a line of credit, so catch up as much as possible);
• You’ve maxed out your credit;
• Your credit score is below a certain threshold;
• You have a high debt-to-income ratio.

You’re eligible for a favourable interest rate

If you have a good credit history and credit score, you can shop around for the lowest rates. But if you have borderline creditworthiness, lenders offset the risk that you might miss or be late with payments by charging you higher interest. Similarly, lenders offer lower rates on secured lines of credit because there’s an asset that can be sold off if you default on your payments, which lowers the risk to them—but puts you at risk of losing that asset if you aren’t disciplined with your payments. 

Some of the reasons mentioned above for ineligibility also apply to higher interest rates. 

Notably, if a high debt-to-income ratio doesn’t disqualify you from getting a line of credit outright, you’ll only qualify to get one with a high interest rate. 

You’re disciplined with your spending

Think about your spending habits. If you’re an impulsive buyer, would more credit be the solution to your credit card debt? Probably not. 

For example, if you use a line of credit to pay off your credit card debt, but then you start using the credit cards again, you’ll not only have to manage making your monthly payments on the line of credit, but also on your credit cards. In other words, a line of credit would cause you to accumulate more debt, which is totally counterproductive.

Consider a line of credit only if you are sure you’ll use it to pay for your existing credit card debt—not as a means to spend more or rack up more debt on your cards.

You’re not looking for additional credit anytime soon

A line of credit could impact your ability to secure additional credit, depending on how much money you borrow, whether you use it to pay off debt, and how quickly you pay back those borrowed funds. That’s because lines of credit affect your debt-to-income ratio (DTI) and credit utilization ratio, which makes up about 30% of your credit score. Having a high DTI and/or a high credit utilization ratio can limit your ability to acquire additional credit—such as a car loan or mortgage—in the future.

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Alternatives to using a line of credit to pay off credit card debt

You deserve to feel confident about your finances and not stress about compounding interest. The best solution to credit card debt depends on your personal situation. 

As a first step, start a conversation with your bank or creditor. Tell them your situation and try to score one of these solutions: 

• Temporarily lower interest rates
• Credit card balance transfer
• Payment plan that works for you

And if that doesn’t work? You can contact a not-for-profit credit counselling agency that can provide you with free advice and a debt-relief solution that suits your needs and brings you peace of mind. 

This article is written by Anna Guglielmi, a certified credit counsellor and financial coach with Credit Canada. She is certified under Accredited Financial Counsellor Canada (AFCC) and the Bankruptcy and Insolvency Act (BIA).

Credit Canada is Canada’s first and longest-standing credit counselling agency. For more than 50 years, Credit Canada has been helping Canadians lead healthy financial lives, achieve their goals, and improve their quality of life through financial education and debt resolution. As a national, non-profit organization, Credit Canada has helped thousands become debt-free and achieve financial wellness. 

If you are struggling with debt, you can contact Credit Canada for free credit counselling services.

Read more about building credit in Canada:

• How to get a mortgage with bad credit
• How much credit card debt does the average Canadian have?
• What to do if you’re a victim of bank account or credit card fraud
• How to build a credit history while renting in Canada