Carrying high-interest credit card debt can feel like an endless trap. No matter how much you pay every month, it seems like that balance just won‘t budge while interest charges continue piling up.
But what if you could leverage a simple debt repayment strategy to erase credit card debt fast without needing extra income? That strategy is known as velocity banking – and while the banks don‘t really want you to know about it, it can be an incredibly effective debt payoff method.
In this comprehensive guide, we’ll break down everything you need to know about velocity banking, including:
- What is Velocity Banking and How Does It Work?
- The Benefits of Using Velocity Banking
- Velocity Banking in Action: A Case Study
- Tips to Get Started with Velocity Banking
- The Drawbacks to Consider
- FAQs about Velocity Banking
Let’s get started!
What is Velocity Banking and How Does It Work?
Velocity banking is a debt repayment strategy that uses a line of credit to rapidly pay down credit card balances. It works by taking the following steps each month:
- Transfer all credit card balances to a line of credit
- Use income/cash to pay off the credit cards (now zero balance)
- Pay off the line of credit using income, contributions to savings, etc.
This cycle repeats monthly. By moving balances to a line of credit, which typically has a lower interest rate, you end up slashing the total interest paid and can eliminate debt rapidly.
For example, if you had $10,000 in credit card debt at 19% interest, the monthly interest would be around $158. By transferring to a line of credit at 9% interest, you would only owe around $75 a month in interest charges instead.
By focusing all your additional payments on the lower-rate line of credit instead of multiple high-rate credit cards, everything gets paid off faster. The money you were wasting on high interest gets redirected to reduce principal much quicker.
The concept is that by speeding up the velocity at which money moves in and out of your accounts to pay off debt, you can eliminate what you owe faster. Hence the term “velocity banking.”
How to Qualify for a Line of Credit
To use velocity banking, you’ll need access to a line of credit with a lower interest rate than your credit card. Usually personal lines of credit from banks have rates ranging from 6-12%.
These products function essentially like a credit card with a fixed limit that lets you draw money as needed. Rates are often lower because lines of credit are typically secured by home equity while credit cards are unsecured.
Qualifying factors for personal lines of credit include:
- Good to excellent credit scores (660+)
- Low debt-to-income ratio
- Significant home equity
Depending on your situation, minimum credit scores may range from 660 to 740. The higher your credit score and income compared to living expenses, the better the chances of getting approved.
The Benefits of Using Velocity Banking
There are a few major perks that come with using velocity banking for debt repayment:
1. Save Substantially on Interest Payments
The interest rate on most credit cards hovers between 14-25% APR. Even at the lower end, an interest charge of 14% annually adds up fast on large balances.
With velocity banking, you shift those balances over to a much lower rate typically around 6-12%. By putting your money toward principal instead of excessive interest fees, you get out of debt years faster.
For a real word example, let’s look at a credit card with a $15,000 balance, 19% APR and a 2.5% minimum monthly payment:
- It would take over 17 years to repay and cost $20,632 in interest charges
- By shifting to a line of credit at 9% APR and making just $500 monthly payments, payoff takes less than 5 years with only $5,491 in interest
That’s over $15,000 saved on interest payments alone!
2. Pay Off Debt Faster
According to NerdWallet’s 2022 Household Credit Card Debt study, the average household owes $8,590 in credit card debt with an APR of 16.15%.
It would take over 12 years paying just the minimums every month before that balance gets erased. Even boosting payments to $200 a month means still owing $3,000+ after 5 years thanks to mounting interest fees.
Velocity banking offers a way out of the debt payoff trap. By restructuring payments through a lower-cost line of credit, you could knock out $8,590 in under two years!
3. Build Credit History & Scores
An additional benefit of velocity banking is that responsibly managing lines of credit helps build your credit profile for the future. Having a mix of loan types on your credit reports proves you can handle different types of accounts.
As you pay down balances each month and keep utilization low, it shows positive payment behavior and responsibility. Plus, access to lower-cost borrowing means your credit scores increase over time.
4. Simplify Payments & Budgeting
When you have balances scattered across multiple credit cards at different interest rates, it makes budgeting a headache. You have all those statements to track with varying due dates, minimum payments, etc.
Velocity banking consolidates payments into a single line of credit so everything is in one place. You eliminate confusion tracking five credit card bills to keep just one loan payoff on the radar. Easy payment tracking means more money directed at debt repayment!
5. Flexible Access to Low-Cost Credit
One upside of shifting debt to a line of credit is that it also offers you low-cost access to credit if needed again down the road. Depending on your plan terms, you may be able to draw more money even as you repay your balance.
That flexibility means fewer high-interest charges if unexpected expenses come up before getting completely out of debt. If used responsibly, lines of credit give borrowers more affordable financing options.
Just don’t get tempted to tap available credit without reason. The goal remains staying disciplined and putting excess income toward your payoff plan until achieving a zero balance!
Velocity Banking in Action: A Case Study
To really drive home the power of velocity banking, let‘s walk through real-world results from Cindy, a client I worked with last year…
The Problem:
Cindy was a successful entrepreneur making over $150,000 a year running her own social media consultancy. However, she had racked up nearly $22,000 in credit card debt over several years from funding startup costs before revenue took off.
Most of her cards had APRs of 17-22%. She was making the minimum payments, but despite her healthy income, the debt was barely shrinking month to month. After another year with no progress, Cindy felt overwhelmed and unsure what steps to take.
The Solution:
I advised Cindy to leverage velocity banking – here was her new game plan:
- Applied and qualified for a variable-rate HELOC at 4% APR with a limit to cover her debt
- Transferred all $21,730 of credit card balances onto HELOC
- Funneled monthly income formerly going to credit card payments into paying off HELOC instead
- Also used quarterly tax savings that used to sit in low-yield account to accelerate payoff
The Results:
In just 8 months, Cindy paid off the entire $21,730 debt through velocity banking!
Instead of waiting a decade or more to get out of debt had she continued only making minimum card payments, velocity banking let Cindy erase high-interest credit balances rapidly. After seeing velocity banking in action, she is also now using the strategy to pay off her auto loan years early.
Velocity banking gave Cindy back control of her finances. She no longer feels weighed down by debt payments eating up her income. By designing an easy-to-implement but aggressive payoff plan, Cindy is now saving thousands in interest and built momentum around other money goals.
Tips to Get Started with Velocity Banking
Ready to put velocity banking into practice in your own life? Here are my top tips to set yourself up for success:
Tip 1: Find the Best Line of Credit Rates
Shop around at banks and credit unions to find the lowest rate possible on a personal line of credit or HELOC – aim for under 10% APR if possible. Even a couple percentage points make a big difference in how quickly you get out of debt.
Online lenders sometimes offer promotional rates under 5% too. Use a multi-lender marketplace like Credible to explore multiple options at once without hurting your credit.
Tip 2: Automate Transfers & Payments
Manually moving money around between accounts each month is annoying and leads to errors over time. Set up automatic monthly balance transfers from your cards onto the line of credit so you build an effortless system.
Tip 3: Pay Immediately After Getting Paid
Don’t wait until the due date to make your monthly debt repayment out of a checking account buffer. Move the money over as soon as income hits your bank account so it goes straight toward debt before you get a chance to overspend elsewhere.
Tip 4: Use a Debt Payoff Calculator
Plug your numbers into a debt payoff calculator to estimate how quickly you can get out of debt based on the line of credit rate and monthly payment amounts. Being able to visualize the payoff timeline will motivate you as the balance drops each month.
Tip 5: Pay Even More Whenever Possible
Automate minimum payments, but look for opportunities to put lump sums toward debt whenever possible like from tax refunds, birthdays, etc. Even an extra $100/month speeds up the velocity banking payoff. The faster you eliminate debt, the sooner you can shift focus to other financial priorities.
Follow these steps to put velocity banking into action starting next month!
The Drawbacks to Consider
While extremely effective when executed correctly, velocity banking does come with a few drawbacks to factor into your decision:
Credit Inquiries Lower Your Scores Temporarily
Applying for a new line of credit means banks will check your credit, creating a hard inquiry on your reports. Too many inquiries in a short span can lower scores by a handful of points.
However, as long as you space out applications 6+ months apart, this impact is short term. Plus it’s offset longer term by the positive effects of responsibly managing installment loan accounts.
Loan Origination Fees & Closing Costs
Opening a HELOC often incurs upfront loan origination fees charged by the lender (around 2-5% of the total borrowing amount). There may also be appraisal costs.
With a personal line of credit, these charges are less common but still possible. Just factor origination fees into the total interest cost comparison when deciding if velocity banking with a line of credit makes sense.
Discipline is Required
Like any debt payoff plan, velocity banking only works if you stick to it. If you take advantage of lower-rate access to shift balances over but then run up credit cards again, it defeats the purpose.
You have to remain disciplined about not taking on new consumer debt or overspending while aggressively paying off the line of credit until achieving a zero balance. Stay focused on the payoff goal!
Frequently Asked Questions
Still have some questions about how velocity banking works? Here are answers to some of the most common queries:
Does closing credit cards hurt your credit?
Yes, closing your oldest credit cards can temporarily ding your credit scores a few points by lowering your total available credit limit and increasing utilization ratio.
With velocity banking however, you leave cards open even once paid off through the line of credit. So there is no credit score impact from closing accounts (though you should refrain from using paid off cards again).
How long does it take credit scores to improve?
Paying off installment loans responsibly has a positive impact on your credit scores as soon as it reports to the bureaus each month. As your total debt decreases and unpaid balances shrink compared to original loan amounts, scores slowly improve.
In most cases, it takes at least 3-6 months before notable credit score increases. The effects compound over time the closer your balances get to zero.
Is it bad to pay off a loan early?
No, early loan payoff is not bad for your credit whatsoever. As long as payments are made on time, paying more toward the principal to erase debt faster has a positive effect.
Just make sure to follow lender guidelines on any pre-payment penalties. Most personal loans and lines of credit don’t have penalties for accelerated repayment.
How much can you borrow from a HELOC?
HELOC limits are based on how much equity you have available. Most lenders let you borrow 75-90% of your equity minus anything owed on mortgages. So if your home is worth $500k and you owe $200k on the mortgage, you may qualify for a line up around $225k.
Should I use a HELOC or Personal Line of Credit?
HELOCs tend to offer lower rates but need home equity built up already to qualify. Personal lines of credit typically have higher rates but just use your credit report/scores for approval so they’re more accessible.
Run the numbers based on the rates you actually qualify for and repayment timeline to see if the savings outweighs origination fees. If home equity isn’t high enough for prime HELOC rates but your credit is good, a personal line likely makes more sense.
Put Velocity Banking into Action!
Velocity banking offers a simple but effective approach to slash interest costs and get out of debt years faster. By leveraging a low-rate line of credit to attack credit card balances, you save substantially on interest payments and eliminate principal much quicker.
While credit card companies would prefer borrowers stuck paying only minimums for decades, velocity banking empowers you to take control of your debt situation. By lowering interest owed to banks and putting those savings toward principal instead, you can realistically be free of burdensome credit balances within months instead of dragging on for years or even decades.
Ready to put velocity banking to work for your finances? Follow the tips above to get started and accelerate your debt payoff timeline. The sense of momentum and financial freedom you’ll gain makes velocity banking worth the temporary effort and discipline required.
You’ve got this! Here’s to a debt-free future.
Regards,
John Smith
Certified Financial PlannerTM