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Torn between credit card and bond repayments

May 26 2017 20:41
Carin Smith

A Fin24 user is not sure which way to go to reduce his debt. He writes:

I have a bond with an access bond facility with funds available should I need it.

If I don't use these funds, my bond will be paid up in about five years’ time.

I have a credit card that I want to get rid of, but am battling to settle.

Is it viable to take funds out of the bond and pay off my credit card and add the credit card instalment to my bond instalment?
 
Craig Torr of Crue Invest responds:
 
Following our recent credit rating downgrade to junk status, our advice to all consumers is to settle short-term, unsecured debt as a matter of priority.

It is likely that, following our downgrade, interest rates will rise in the medium-term, and you are correct in wanting to settle your credit card debt as soon as possible.

In providing this advice, we have assumed that the interest charged on your credit card is higher than that of your home loan, which is usually the case. Typically, credit cards charge interest rates of between 16% and 22%, whereas home loans attract interest rates of around 10.5% depending on the terms of the loan.
 
A home loan is relatively cheap because it is a secured loan and the risk to the borrower is reduced by the security offered by immovable property offers.

On the other hand, short-term debt, such as credit card debt, attracts higher interest rates because of the risk that it poses to the borrower.
It is widely accepted that a home loan is the cheapest, most flexible way of borrowing money and, as you have identified, a home loan can be a useful debt instrument if used wisely such as paying off short-term debt such as your credit card.
 
Keeping in mind that the term of your home loan is longer than that of your credit card, we believe it would be prudent to use your access bond to pay off your credit card and then immediately channel your credit card repayments towards your home loan.

You will effectively save the difference in interest cost between the credit card and home loan, thereby lowering the interest paid on the credit card debt. This will further have the effect of increasing your monthly home loan repayments and shortening the term of your home loan.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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