Unlike a loan, a line of credit allows you to borrow against a pre-set limit. As you make purchases, your balance increases until you reach your limit or make a payment. Making a payment reduces your balance, allowing you to use the line of credit for additional purchases. Most consumers have at least one line of credit in the form of either a home equity line of credit or a traditional credit card.
A low balance benefits you by making you a lower risk to future lenders, boosting your credit rating and providing you with more financial wiggle room in an emergency. A little financial restructuring allows you to pay down your line of credit – and start reaping the benefits of doing so – much more quickly.
Make a Budget
The fact that paying down a debt faster requires you to make additional or larger payments is a no-brainer. The question is where those additional funds will come from. A simple two-step budget helps you determine exactly how much disposable income you have and where it's going each month.
Track Your Spending
Tracking your spending is a crucial part of budgeting because it lets you see exactly where your money is going. This, in turn, helps you decide where you can cut corners most effectively to pay down debt. For this to be effective, you must keep track of everything you spend and what you spend it on. You can do this the old-fashioned way with a pen and notepad, but if you have a smartphone, consider downloading a budgeting app that keeps track of your daily expenditures for you.
Eliminate Unnecessary Purchases
After a month, sit down with your data and determine what you can eliminate from your budget in order to pay down your line of credit faster. While you can't simply stop paying your rent or utilities, you can eliminate non-essential items such as twice-weekly trips to the coffee shop or online shopping splurges in order to redirect those funds to your debt.
You don't have to devote every dime of your disposable income to paying down your debt. If you leave yourself with no money to spare, you're more likely to give up and revert back to the minimum monthly payment.
Redirect Your Windfalls
Your everyday income likely isn't the only income you receive. Over the course of a year, you might receive tax refunds, a small inheritance, monetary gifts or even a raise or bonus at work. As tempting as it may be to blow any extra money you receive, consider redirecting it to your line of credit. Remember that every dollar you pay down saves you additional money in interest charges.
Rearrange Your Debt
Restructuring the debt you have can help lower the total amount of interest you are responsible for. If your line of credit is a credit card, for example, consider transferring your balance to a lower-interest card. While this doesn't eliminate your debt, it restructures it in a way that costs you less over time, allowing you to pay it off quicker.
If you're in the market for a new credit card, consider choosing one that offers introductory benefits such as no interest for six months. Using a no or low-interest credit card to pay off your line of credit is yet another method of transferring the debt and either lowering or eliminating the interest for a quicker payoff.
If you desperately need to pay down a large chunk of your line of credit quickly, borrowing may be the way to go. Consider low- or no cost borrowing from one of the following sources:
- Friends and family - If a loved one agrees to loan you money, that loan is likely to come without interest charges. Friends and family are also more likely to offer flexible repayment terms.
- Your 401(k) - A 401(k) loan may be ideal since you'll have access to a lump sum and the interest you pay goes back into your retirement savings account rather than to a bank.
- A personal loan - If your bank can offer you a lower interest rate on a personal loan than you're currently paying on your line of credit, paying down your debt with a personal loan makes sense.
- Your life insurance policy - You can usually borrow against some forms of life insurance. The drawback, of course, is that if you don't repay what you've borrowed, your beneficiaries will receive a lower payout in the event of your death.
- Experian: Difference between “balance to limit” and “debt to income” ratio
- Bankrate: Secrets to Creating a Budget
- Consumer Financial Protection Bureau. "Differentiating Between Secured and Unsecured Loans." Accessed May 11, 2020.
- Nolo. "What Can Creditors Do If You Don't Pay?" Accessed May 11, 2020.
- Federal Trade Commission. "Home Equity Loans and Credit Lines." Accessed May 11, 2020.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.