Paying off credit card debt with a bond only works with discipline

Question

I accrued R80,000 of credit card debt during a difficult period. Things are now more stable, but the debt is expensive at 20.6% interest. I have available credit in my access bond, where the rate is 9.75% and only six years remain. Would it make sense to use the bond to pay off the credit card, or would that simply stretch the debt out for longer?

Answer

Not all debt is the same. A home loan and a credit card may both be debt, but they do not damage your finances in the same way. The key difference is what they cost you.

In your case, the numbers make the starting point fairly clear. Your credit card is charging 20.6% interest. Your access bond is charging 9.75%. This means the credit card debt is costing you far more every month, and replacing that expensive debt with cheaper debt is, at least mathematically, a sensible move.

On R80,000, the interest rate gap is significant. At the starting balance, the difference is roughly R8,680 a year, or about R723 a month. So this is not a tiny saving. It is meaningful. If you use the access bond to clear the card, you are very likely reducing the cost of carrying the debt.

That said, the maths is only half the story. The real risk is behaviour. This strategy works well when you are refinancing debt, but it works badly when you are simply moving the debt from one place to another and then starting the cycle again.

Unfortunately, this is what often happens. Someone uses the bond to pay off the card and then starts using the credit card again because the limit is available and the pressure feels lower. A few months later, they are sitting with a larger bond balance and a growing credit card balance.

So, the question is not only whether you can use the bond to settle the card. The more important question is whether you are willing to change the habit that caused the debt to build up in the first place. If the answer is yes, then using the access bond can be a very practical solution.

When people feel buried in debt, they often focus on which balance is biggest. But the better approach is usually to focus on which debt is charging the highest interest rate. This is because every extra rand used to repay expensive debt gives you the biggest guaranteed benefit.

If one debt costs 20.6% in interest and another costs 9.75%, then paying off the 20.6% debt first is like earning a risk-free return of 20.6%. This is hard to beat anywhere else and is why credit cards, store cards and unsecured loans usually deserve attention before lower-rate debt such as a vehicle or home loan.

A lower rate can make debt feel less urgent. This is dangerous. The goal is not simply to make the debt more comfortable – it is to get rid of it.

If you use the bond to settle the credit card, then you should keep the pressure on yourself. Do not treat the lower instalment or lower interest bill as spare money to spend elsewhere. Redirect the saving back into the bond.

In other words, use the bond to lower the cost of the debt, but keep repaying it with the same urgency you would have needed in respect of the credit card.

Three principles to follow to manage your debt

First, clear the card and stop using it as a borrowing tool. Keep it open for emergencies or convenience if you must, but do not slide back into revolving debt.

Second, keep your repayment level high. If moving the debt to the bond improves your monthly cash flow, use that improvement to pay down the bond faster.

Third, set a deadline. Do not allow the debt to drift along for years just because the rate is lower. Give yourself a target date by which the R80,000 should in effect be repaid.

In your case, I do think using the access bond to settle the credit card can make sense. But the move only works if you combine it with discipline. Clear the card. Do not build up debt again. Keep paying aggressively into the bond. And set a goal of becoming debt-free.

The solution is not just finding cheaper debt. It is using cheaper debt as a tool to get rid of expensive debt for good. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpadvice.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.