From what debt consolidation is, your options, considerations and how it can improve your credit score, we’ve covered it all.
If you’ve found yourself in a tricky spot with multiple outstanding debts, you might feel like you’re drowning in various repayment amounts and . On top of this, it’s only human to worry about the impact it might be having on your credit score.
One option to make things more straightforward and possibly boost your credit score at the same time, is .
What is debt consolidation?
Debt consolidation can be beneficial because:
1) You only have one monthly repayment amount and interest rate to keep on top of
2) It’s easier to work out your monthly budget
3) It could help to improve your credit score.
That’s not to say it doesn’t have potential drawbacks, but we’ll cover those later on. Firstly, let’s do a whistle-stop tour of the different types of debt consolidation available to you.
Debt consolidation loans
So, let’s pretend you have £10,000 in outstanding debt spread across one store card, one personal loan and two credit cards. In this scenario, you’d be paying off four separate balances and interest rates, possibly on different days of each month. Making your head spin?
With a debt consolidation loan, you could take out £10,000 to clear all of your existing credit, and instead make one monthly repayment to one creditor.
Your debts will be more streamlined and easier to manage, and this is likely to help with budgeting. On top of this, you could find yourself paying back less in repayments each month, too.
Paying less back each month might sound great, but the reality is this will mean you’re likely to be paying back your loan over a longer period of time, and possibly paying more interest in total.
Balance transfer cards
A balance transfer card is used to move the balance from one or more credit cards to another.
Again, your debts are all moved into one place making repayment a one-stop shop and helping with your monthly budgeting. On top of this, some lenders now offer cards with minimal or even 0% interest for a limited period, so you could pay less each month and be debt-free sooner.
If your credit score is suffering because of multiple outstanding debts, then you may find you aren’t offered the best deals on new cards. It’s also important to bear in mind there’s typically a fee for a balance transfer, so make sure you know what you’re signing up to before you go ahead.
Money transfer card
The big difference here is that, similar to a debt consolidation loan, you can use a money transfer card to put money straight into your bank account. For this reason, you aren’t limited to clearing only credit card debt.
Money transfer cards can be used to pay off any debts - whether they be store cards, credit cards or loans. So, if you’re currently paying high-interest rates on outstanding credit, a money transfer card could offer more competitive rates, saving you money in the long run.
The drawbacks of money transfer cards mirror that of balance transfer cards, and include the fees attached and less preferable rates if you’ve got a patchy credit history.
A word of warning
With all three forms of debt consolidation, there’s something very important to bear in mind. The goal of debt consolidation is to clear your outstanding balances, but for some of us, this could prove dangerous.
If you’ve struggled to control your spending in the past and that has led you down the path of debt consolidation, it’s super important you don’t fall back into bad habits and start spending on your cleared cards again.
The key to debt consolidation making things easier for you is to avoid taking on new debt and finding yourself in worse financial shape than before.
Tip: If you know you struggle to avoid temptation when it comes to spending on your credit card, consider closing your accounts following debt consolidation. This could put a slight dent in your credit score, but it’ll ultimately boost your finances and your credit score will recover over time.
So, could debt consolidation improve your credit score?
There are two ways in which debt consolidation could boost your credit score:
1) Your cleared balances on previous debts could serve as a big tick when it comes to your credit report.
2) If you’ve had trouble meeting your different payments in the past, sticking to your new streamlined monthly repayment could gradually repair any damage done by your past credit habits.
As we mentioned earlier, there are a couple of drawbacks to debt consolidation and unfortunately, these also relate to your credit score:
1) Applying for a loan or credit card will leave a footprint on your credit report as it involves a ‘hard search’, and if you’re unsuccessful on one or more occasions this could indicate you’re overly reliant on credit to potential lenders.
2) If choosing the money or balance transfer card option means maxing the credit limit to have enough to clear other balances, this could negatively affect your credit score. This is because carrying a high balance can put a dent in your report.
Don’t worry, there are things you can do
If you’re seriously considering debt consolidation then, ultimately, your goal is to be debt-free, and any bearing on your credit score in the meantime is probably lower on your list of priorities.
That said, there is something you can do to minimise the impact.
Do your homework
Spend some time looking for the right lender for you. There are companies who specialise in offering credit to people with less-than-perfect credit scores and applying for credit to one of these companies will reduce your chances of being turned down, and therefore limit any further impact on your credit score.
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By Bryony Pearce