Credit cards can be appealing for many reasons. They can be simple to get and they’re easy to use. They often have attractive incentives associated with them, like collecting travel points or cashback rewards.
But many credit cards have annual fees that sneak up on consumers, along with high interest rates. This means charges can quickly add up if you carry a large balance each month.
While credit cards were designed to make purchases, they aren’t always your best choice. A personal line of credit — secured or unsecured — gives you access to a pool of money whenever you need it and can actually help you save in the long term.
Why use a line of credit instead of a credit card?
While credit cards can be great for everyday purchases, a line of credit can help you cover unexpected expenses, such as emergency repairs. It can also temporarily fill cash flow gaps.
Here are some benefits to using a line of credit instead of a credit card:
- Interest rates are lower than many retail credit cards
- Can help you avoid credit card transaction fees
- Useful when it will take longer than a month to pay back a large purchase
The high cost of retail credit cards
Let’s say you have an unexpected expense. Your car breaks down and needs some repair work done, with the total amount coming to $5,000.
You don’t have the money for these repairs right now, so you decide to pay using a credit card at 28% interest. If it takes you one year to pay the bill, it will cost $482.53 a month, and the total interest paid in the year will be $790.36.
However, if you use the funds from a line of credit at 7.5% interest, it will cost you $433.79 a month, and total interest paid in the year will be $205.44.
That’s a savings of $584.92 using a line of credit.
The power of one payment
If you’re making purchases using a few different credit cards, you may find yourself struggling to keep up with the various payments. If this becomes an issue, you’re likely going to be incurring late fees and more debt as time goes on.
This is where you may want to consider consolidating your debt. This just means taking your debt balances and putting them together under a single line of credit. This way, you’re turning a handful of credit card bills into just one payment per month. That’s also much easier to monitor and manage.
To help you stay on top of your finances, consider using CIBC Online Banking®, which allows you to view all your accounts in one place. You can review your balances, make additional payments — sometimes even using reward points — and view your payment history whenever it's convenient for you.
How do you use your line of credit?
Pay for purchases using your line of credit by simply transferring the funds from your line of credit account into your chequing account, either online or over the phone. You’ll be able to access those funds instantly. You can also pay bills or withdraw cash from your line of credit.
If you’re interested in discussing how a line of credit can help you achieve your long-term goals, reach out to a CIBC advisor to learn more.
