Question

I built up R80,000 of credit card debt during a difficult period. Things are now more stable, but the debt is expensive at 20.6%. I also 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 access 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%. That 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, that 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, that is what often happens. Someone uses the bond to pay off the card, feels a sense of relief, 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. What looked like a clever move ends up making the problem worse.

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.

That is because every extra rand used to repay expensive debt gives you the biggest guaranteed benefit.

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

A lower rate can make debt feel less urgent. That is dangerous. The goal is not simply to make the debt more comfortable. The goal 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 that 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 on the credit card.

Three principles to follow to manage debt

1. 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.

2. 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.

3. 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 effectively be repaid.

In your case, I do think using the access bond to settle the credit card can make sense. You are not necessarily dragging the problem out. You are reducing the cost of the problem. But the  move only works if you combine it with discipline. Clear the card. Do not rebuild it. Keep paying aggressively into the bond. And set a clear 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.