Credit cards are used for a number of financial purposes ranging from paying your bills on time to staggering the bills across equated monthly instalments (EMIs) or for consolidating multiple bills into one. Aside from all this, you can also use a credit card for debt consolidation. What it essentially means is that you can use your credit card to repay your current loan (s).
Let us understand how this works. Suppose Mr X has a current credit card obligation of ₹2 lakh which he needs to repay, and then there is a personal loan of ₹1 lakh which he took six months ago and will continue for another one year.
What Mr X can do is to use a different credit card to repay both the debt obligations so long as the available credit limit of this new card is more than ₹3 lakh.
But why should he do this? There are a number of advantages: first and foremost, he only needs to deal with one loan instead of two or more loans across categories. It's easier to keep tab on one deadline every month for the EMI payment instead of two or more deadlines for different loans. Second, when you consolidate the debt, it is seen as a repayment of old debt. This helps your credit score to inch upward.
However, before you use your credit card for debt consolidation, you should keep in mind the following points:
I. Credit utilisation ratio: The ideal credit utilisation ratio of credit card is 30 percent. So, at the time of debt consolidation, make sure that you are not surpassing the optimum entire credit limit. Although there is no rule of thumb that prevents you from doing so, but you stand to lose out on your credit score if you opt for it.
II. Balance transfer: At times, credit cards give promotional balance transfer rates, which enable the card users to transfer debt from higher-interest cards to a new card with a lower interest rate. This can help reduce interest costs and make it easier to pay off your debt.
III. Debt payoff: By consolidating your debts onto a single card, you simplify your payments. However, it’s vital to pay off the balance before the promotional period ends, as interest rates can spike afterward.
IV. Miscellaneous expenses: Be mindful of the potential fees associated with balance transfers and ensure you don’t add new debt on the original cards, since this could worsen your financial situation.
There are a number of other consolidation methods which include personal loans depending on your circumstances. So, it’s advisable to evaluate your financial situation and consider seeking advice from a wealth advisor.
