Using credit to pay off credit
Advantages of using credit to pay off credit
Credit can attract varying degrees of interest charges. It is sound financial sense to make use of a credit facility with a lower interest rate to clear a form of credit with a higher rate.
Preventing legal action
Some companies have reached a point where legal action is ready to commence. Such action may be unavoidable unless the debt is repaid. Under such circumstances it may make sense to borrow in order to pay off such a debt.
It may be that debts to a large number of creditors could be consolidated into a single loan that simplifies the arrangements for repaying. Multiple debts that need to be paid, possibly on different dates within the month, can create difficulties and require high maintenance.
Disadvantages of using credit to pay off credit
The worry when we pay off debt utilising other forms of credit is that the debt rises sharply. We are 'robbing Peter to pay Paul' - good news for Paul - but not for us! The problem for us is that we just don't have enough to make ends meet, and we feel trapped in a vicious circle of credit-dependency.
Good credit rating
The irony is that if we are up to date with our debt repayments, we may well have access to further credit. We are regarded as good borrowers because we also make repayments. But the payments are made by further credit and our strong credit score disguises the fact that we're struggling.
Out of control
It is likely that the more streams of credit we have the more difficult it will be to control the various repayments. What started out as simple exercise of a standing order to repay a loan or a payment to our credit card company when the statement arrived, now needs a good deal of planning and discipline.
If we are relying on one stream of credit to pay off another it may well be that the time has come to seek professional advice regarding debt solutions.