Should I Consolidate My Credit Card Debts?

If you have debts spread across several credit cards you might consider consolidating them into one place. But is it a good idea and will it help you clear your debt any quicker?

Read on to find out more.

What is credit card debt consolidation?

Credit card debt consolidation is the process of moving several separate debts into one place. You could do this by taking out a loan and using that to repay all the other debts, or you could get a balance transfer credit card and move all the debts onto that one card.

The idea with credit card debt consolidation is that, by borrowing one sum of money and using it to pay your other debts, you only have one monthly repayment going forward. This can reduce the amount of interest you pay.

It may also mean your repayments fall, if the interest rate on your new deal is lower than the rates previously being charged across your other accounts.

However, don’t just assume that debt consolidation is the best option, it entirely depends on your personal circumstances and on the debts you have.

» MORE: What is credit card debt?

Should I consolidate my credit card debts?

Before you consolidate your credit card debts, it is important to consider your financial situation and whether it is the best option for you. If you have savings, it might be cheaper to use some of those to clear your debts.

Ideally, you wouldn’t leave yourself without emergency savings, but if you can afford to clear your debts it may make sense. This is because you are likely to be paying more interest on your debts than you are earning on your savings.

Next, consider your credit rating. Is your credit score good enough that you will be able to take out a credit card or loan to consolidate your existing debts? And will that new debt have a lower interest rate?

There is no point moving all your debts onto a new credit card with a higher interest rate, unless it will leave you with more manageable monthly repayments. What you are looking for is either a deal that saves you money or, if you are struggling with repayments, one that makes them more manageable.

Also, be aware of how long it will take you to repay your loan or balance transfer card. If you can afford your current monthly repayments, don’t be tempted to consolidate onto something which will extend the term. This will drag out the time it takes you to become debt free and may increase the amount of interest you will pay overall.

You can work out if consolidation is right for you by calculating the total cost of your current debts – how much you owe, plus how much interest you will pay – and your total monthly payments. Then compare that amount with the total cost of borrowing one amount to repay those debts.

For example, let’s say you have three credit cards.

1. Credit card number one has a balance of £1,000 at 18% APR and you repay £75 a month. It will take you 15 months to clear the debt and cost you £114 in interest.
2. Credit card number two has a £1,200 balance at 22% APR, and you pay off £100 a month. You will need 14 months to repay the debt and it will cost you £151 in interest.
3. Credit card number three has £800 on it at 28% APR, and you repay £50 a month. This will take you 20 months to repay and cost you £183 in interest.

So, in total you owe £3,000 and your monthly repayments are £225. By the time you pay off all three credit cards you will have been charged £448 interest.

You could move all those debts onto a balance transfer card with an 18-month interest free period and a 3% balance transfer fee.

On £3,000, that balance transfer fee would add £90 to your debt. You could then clear the whole amount in the 18-month period with monthly repayments of £166.66.

In this example, consolidating your debts would cut the amount of interest you pay, lower your repayments, and shorten the amount of time it takes to become debt free.

The pros and cons of debt consolidation

Pros

• You may reduce your monthly repayments.
• You might pay less interest.
• You can simplify your finances.

Cons

• It could take longer to clear your debts.
• You may end up paying more interest.
• Your credit rating could limit your consolidation options.
• The cost of your debts could spiral if you cannot manage monthly repayments.

Whether consolidation is right for you will depend on several factors. If you are in any doubt about how to proceed, charities like StepChange can offer advice and support.

» MORE: How to pay off your credit card

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