Consolidate Debts Using a Line of Credit or Overdraft

Consolidate with Line of Credit

Consolidate Debts Using a Line of Credit or Overdraft

Before the recession hit, it seemed quite easy to qualify for a line of credit. Now that the global economy has changed, a line of credit may be much harder to qualify for. You can check with your bank or credit union to see what their criteria is. Usually they want you to have a good credit score, good income and hopefully a good, positive net worth (but this isn't always necessary).

Lines of credit and overdrafts can be secured or unsecured. It depends on your situation and the bank's lending policy at the time (lending policies change from time to time).

A line of credit and an overdraft are essentially the same thing. They both turn your bank card (debit card) into a credit card so you can spend money you don't have up to a predetermined limit. Just like a credit card, you only have to make a minimum payment each month.

Interest Rates for a Line of Credit or Overdraft

An overdraft is usually the expensive form of a line of credit. Banks and credit unions can charge over 20% interest (just like a credit card) plus a monthly fee. The interest rate for a line of credit, on the other hand, is based on the Prime interest rate. The interest rate on your line of credit then "floats" with the Prime rate. For example, your bank may give you a line of credit for Prime + 2%. If the Prime rate is currently at 2.5%, that would mean that you would pay 4.5% interest (2.5% Prime rate + 2% added on by the bank). How much the bank adds on to your rate depends on a number of factors, including your credit score.

Using a Line of Credit or Overdraft to Consolidate Your Debt

Briefly summarized below are the main advantages and disadvantages associated with this method of debt repayment. Before making a decision on which option of debt consolidation is best for you it is good to have an idea of your overall income and expenses. We always recommend that you speak with a certified non-profit credit counsellor to help outline the complete list of options for you so that you're able to make an informed decision.

Advantages

  1. Lines of credit can offer the lowest interest rates possible
  2. Their minimal monthly payments can provide great flexibility
  3. They can give you tremendous freedom. You can pay it off as fast or as slow as you want

Disadvantages

  1. If you don't discipline yourself to pay a set amount each month that is a lot more than your minimum payment, your debt will never go away. A line of credit or overdraft can feel like an unexpected trap, so here are 3 ways to pay off your overdraft.
  2. A line of credit's interest rate floats with the Prime rate. If the Prime rate goes up substantially, your minimum payments may become unmanageable. It would be a mistake to think that this couldn't happen.
  3. An overdraft's interest rate and monthly fee can make it more expensive than a credit card.