Types of debt
The type of debt you have affects how straightforward it is to pay it off using a credit card. It also influences whether you can pay the debt with a credit card.
Loans and mortgages
Not all credit cards allow you to pay off financial products loans and mortgages. This is because, in the eyes of lenders, paying off existing credit with a credit card is risky. It could potentially lead you into more debt than you can afford to repay.
You will need to do research into the credit card you wish to apply for, to find out whether you can use it to pay off your loan or mortgage. Make sure you find this out before applying, otherwise you could end up with a credit card that doesn’t work for you.
Credit cards and store cards
Paying off debts that you’ve built up on things like credit cards and store cards is much simpler, and pretty much all providers will let you do this. You can pay off these kinds of debts using a:
- standard credit card
- balance transfer card
- money transfer card
Your credit history
If you want to take out any kind of credit card, your credit history will factor into whether lenders accept your application. It will also heavily influence whether you’re able to benefit from good introductory rates, like 0% interest for a set period of time. The better your credit history, the lower the interest rate you’re likely to be offered. However, if you have a poor credit history, it’s unlikely they’ll offer you an interest-free period because, in their eyes, you pose an increased risk of late or non-existent payments.
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Other factors to consider
If you’re looking to pay off your debts with a credit card, the first thing to consider is whether it makes financial sense.
You need to make sure you can afford the new repayments on top of your existing outgoings, so you don't end up in financial difficulty.
Only you can answer this, as it depends on your individual circumstances. But bear in mind the following:
2. Interest rates
If the credit card you’ll be using to pay off your debts has an interest rate attached to it, you need to make sure it’s lower than the interest you’re paying currently on your outstanding debt. Otherwise, you could end up paying more overall.
If your credit history has gone downhill since you took out the credit you’re looking to clear, you may experience difficulty finding a better deal. 0% introductory offers, for example, are usually reserved for those with high credit scores. If you are offered a 0% deal, you should try and clear off your debt before the interest-free period ends. This way, you won’t have to pay any interest. Otherwise, once the deal ends, you will be charged interest on the remaining balance.
Tip: Another way to avoid paying any interest is to make sure you clear your balance in full and on time each month. If you can’t afford to do this, you must repay at least the minimum amount, to make sure you don’t incur any late fees or damage your credit history.
3. Charges and fees
Many card providers make up for the money you save on interest during an interest-free period, by charging a fee for their service. You may be charged a fee worth around 3% of your balance for transferring your debt to a new card.
For example, if you’re transferring a £2,000 debt, the balance transfer fee would be £60 (assuming the lender in question does charge 3%).
Different lenders will have different charges, so it’s really important that you check this before you take out any type of credit agreement. Weigh up all the options to see which is the right one for your circumstances. For instance, the cost of the fee may pale in comparison to the interest you could end up paying using a standard credit card. So, it’s best to do your sums first.
If you’re not convinced a credit card is the right road to go down, you could consider a debt consolidation loan instead. Debt consolidation loans can be used to pay off various types of debt, like credit cards, store cards and overdrafts. They come in different forms, including:
- personal loans, also known as unsecured loans. They’re not secured against any assets you own, such as your house or car. You borrow a fixed amount of money and pay it back in monthly instalments, including interest
- secured loans use something you own, like your house or a car, as collateral in case you can’t pay the loan back. You normally get offered a larger loan with lower interest rates compared to a personal loan. However, unlike a personal loan, you could potentially lose the item you’ve secured the loan against if you can’t pay it back (this is usually a last resort)
- private loans are where you borrow an agreed sum of money from somebody you know (like a friend or a member of your family) using an informal agreement. Together you decide how much and how often you’ll pay the money back
Again, there are pros and cons to all of these alternatives. Don’t forget, you could end up paying back more by consolidating debts if you go for an option that charges more interest than you are currently paying.