Versatility of the Credit Card

More often than not, as a banker, I have found that Credit Cards can serve as extremely valuable tools for both building and reducing debt. Despite their notoriously high interest rates, a credit card’s flexibility of both application and qualification allows a smart borrower the ability to build self-styled solutions to their borrowing goals, without fear of cumbersome application processes or conditions.

The first little known application of the credit card is its uses for the purpose of consolidating and reducing debt. While counter-intuitive in the way that it is usually credit card debt that we are trying to reduce during a consolidation in the first place, it is important to understand how the extremely competitive market for credit cards has resulted in companies ruthlessly competing for business by stealing it from one another.

Through a special feature known as the Balance Transfer, companies have been known to take on a competitor’s credit card debt for as little as 0% interest cost for 3-6months, before returning the card to its original rate. The benefits of this tool then begin to scale when we realize just how many competing credit card companies there are, and therefore how many opportunities there are to continually re-consolidate our debt to the promotional rate.

So long as a borrower can continue to make their payments (and ideally reduce their outstanding balances) on the debt as it is transferred from company to company, they are able to maintain their cheap debt, and actually build their credit score in the process. That being said, unless there is a substantial amount of savings to be had, the amount of time spent continually re-applying may render the benefit moot.

Another way that a clever borrower can leverage credit card debt to their advantage is by using them to build credit after a period of financial difficulty. This is because of the way in which credit cards don’t have as steep qualification requirements as a traditional loan. Between the lower qualifying credit score requirement, and the application’s disregard for the customer’s debt servicing ratios, it becomes particularly easy for a low-quality borrower to begin re-establishing their credit history. By simply making the minimum payments on even a small credit card, an individual is able to make leaps and bounds in their lending quality.

Be it through careful debt planning, or taking the time to juggle between service providers, credit cards provide borrowers with a great deal of flexibility for working towards their financial goals. That being said, without proper care, a borrower can quickly bury themselves in the same kind of debt that drowns savers across the country every day.