Using Credit cards to pay off Credit Card debt – is it recommended?

Using credit cards to our advantage usually means, we are paying the entire debt off every month and therefore are not paying interest on purchases.

For those of us who are NOT using credit to our advantage, this Credit Card debt has become an increasingly difficult problem to manage.  We are limited with the options we can use to reduce and eliminate this debt once and for all.

Of course, the obvious is to stop spending, pay it off in instalments and slowly reduce the principal.  This is a slow and painful process and we are usually paying in excess of 18% interest per annum, making a zero balance a difficult goal to reach.  Budgeting programs are available through many different avenues such as financial counsellors, government sites and independent online programs.  Or you can “change your ways” and learn to budget yourself.  You need to be diligent, focused and determined to reduce your debt and rid yourself of that credit card.

Another option is what CDS specialises in – debt negotiation.  This is negotiating with the banks for a one off reduced payment with the balance written off.  Of course, in these circumstances there can be many catches.  The first being that the banks aren’t going to reduce your credit card balance just because you can’t manage it anymore.  There needs to be a reasonable explanation and proof of financial hardship such as a result of medical issues, unemployment, failed business or marriage breakdown.  Even with this, you will need to have access to the lump sum agreed to for the settlement in order for the bank to accept the reduction.

This leads to another option, Bankruptcy.  Whether full or part by way of a Part IX, both of these options are also costly.  Not just financially but the implications on you personally for years to come can often be detrimental.  People don’t realise that going bankrupt actually costs you money.  In the case of a Part IX, all of your creditors are pooled together and can vote yes or no to accept what is effectively a garnish of your wages for an extended period of time.  These are often 5 year periods where a portion of your wages is taken and passed onto your creditors.  This option will affect your credit rating for up to 5 years.  In the case of a full bankruptcy, you will need to apply with the administrator to travel overseas so the consequences can be quite harsh.

An option that I see a lot of these days is using “Balance Transfer” credit facilities where you apply for another credit card and transfer the debt across.  In most instances IF you are prepared to be disciplined and committed, this can be a great solution for substantially reducing your debt together with huge savings on interest and fees.

It is most important for you to read the fine print.  The offer to transfer your debt to a new credit card will attract very low and most often zero interest. The balance transfer offer will generally only run for three to six months, after which the standard interest rate for that card, or the ‘revert rate’, will apply.  If you start using the card to purchase, the exercise to reduce will be pointless and the reverted interest rate will apply to those products or services.  If the reverted interest rate is anything above 19% you need to consider the costs here too.

While I am a firm believer that you can’t fix debt with debt, realistically this could be an option for many clients that have no alternative.  As I stated in the beginning, this is only ever going to work for those that are truly committed to reducing their debt, those that can control their spending habits and not fall off the wagon.  It will always be difficult. As they say, “nothing worth doing is going to be easy” but the accomplishment, and more importantly the sense of relief will be the biggest victory.