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How does debt consolidation work?
If you want to simplify your credit repayments and make them easier to manage, you may have considered debt consolidation.
To find out a little more about debt consolidation, read our guide and we’ll explain some of the pros and cons.
The pros of debt consolidation
Debts may be easier to manage
When you have several lines of credit open to you, keeping track of the different repayments you need to make each month can feel like a challenge. Different cards will have different balances and different interest rates and will probably needs to be paid by different dates – it can be hard to keep up.
Debt consolidation can make all this easier. Using either a balance transfer card or loan, you can pay off your multiple existing balances and then make just one payment a month.
Interest could be lower
Paying different interest rates on several different debts can get quite expensive. That’s why some borrowers take advantage of balance transfer cards that come with 0% interest for a certain period of time. By transferring their existing credit card balances to the new card, sometimes for a fee, they can avoid paying any interest – providing they clear the balance within the interest-free period.
Even if you aren’t able to take advantage of a 0% offer, you could still save money by consolidating your debts. Having one rate to pay rather than a few different ones could work out cheaper each month as well as easier to manage. Just be sure to do your calculations right and make sure that consolidating your debts won’t end up costing you more than you’re currently spending if a fee is involved.
The cons of debt consolidation
You’ll be paying it longer
One of the ways debt consolidation makes your credit easier to manage is by replacing several payments with one. And this payment might also come to less each month than you were previously paying.
However, if you are paying less each month it could take you longer to get debt-free than it would have if you’d stuck to your original payments.
You may pay more
As we mentioned above, debt consolidation can mean you pay less interest each month than you were originally. However, because you’ll be making repayments for longer, you could actually end up spending more on interest overall.
That’s why it’s so important to take the time to work out whether consolidating your debts really is the right move. You might be happy to pay more for the convenience of making your repayments simpler to manage – but ultimately this is a decision only you can make.
Debt consolidation options
You have a number of options when it comes to debt consolidation. If you have different types of debt you want to consolidate, like a personal loan and a few credit cards, for example, you could apply for a debt consolidation loan and use the money to pay off these balances.
Alternatively, you could use a balance transfer card, which – as the name suggests – lets you transfer the outstanding balances you have on existing credit cards so that you only have one payment to make each month. And there’s also the option of a money transfer card, which you can use to consolidate your credit card balances in addition to things like overdrafts or personal loans. You can learn more about the differences between these two options here.
We hope this blog has made the subject of debt consolidation a little clearer for you.