Monday Myth-Buster: I can't use a credit card to consolidate debts
Wrong! There are cards that are specifically designed to consolidate your debts.
But before we explore how you can use a credit card to consolidate your other debts, it’s important you understand what debt consolidation is.
Let’s take a closer look.
Are your finances manageable?
Debt consolidation is a difficult topic to get to grips with – but it can help simplify your finances. Put simply, it involves you borrowing a lump sum to pay off the multiple unsecured debts you already have.
"Consolidating your debts will mean that you’ll make one monthly payment, rather than several."
You will clear your existing balances, leaving you with a single debt that you’ll pay off through a monthly payment you can afford.
So, why consolidate? Well perhaps you’re having trouble keeping track of the various repayment dates and interest rates and want to make things simpler. Or maybe you feel you’re paying too much interest and want to see if you can reduce your monthly rate.
Consolidating your debts will mean that you’ll make one monthly payment, rather than several. It could also reduce the amount of interest you’re charged each month.
So, what are the options if you want to consolidate?
Debt consolidation loan
Depending on how much your debts come to, you could take out either a personal loan or a homeowner loan worth the same as the amount you owe. You can then use these funds to pay off your existing debts, and you’d pay back the loan by making one payment each month.
A homeowner loan is secured to your property, which means you can often borrow more for longer – but your home is at risk if you stop paying. A personal loan isn’t secured to anything you own, which means you can’t borrow as much – but it’s often quicker to apply.
But didn’t you say you could consolidate debts with a card?
It will all depend on your personal circumstances and also what type of credit you plan to consolidate.
Balance transfer card
This type of credit card lets you transfer your outstanding credit card and store card debts, leaving you with a single monthly repayment. You’ll make this until you clear the balance.
If you have several credit cards with different balances and payment dates, you might consider this option to help make your repayments more manageable.
"There might be a fee to transfer your existing credit card balances to this type of card."
Depending on the credit card provider, some balance transfer cards offer a 0% interest introductory period. This means you’ll pay no interest on the balance for a period of time - reducing the overall amount you’ll need to pay back and helping you clear the debt quicker.
Of course, the deal you’re offered will depend on the lender and your credit history. Typically, low interest or interest-free balance transfer cards are offered to those who have proven they’re a responsible borrower.
Lenders will look at whether you’ve been late or missed payments in the past. They will access your credit history to find this information - this is why it’s important to make sure your credit history is in good shape.
You should bear in mind that there might be a fee to transfer your existing credit card balances to this type of card. Check that this won’t cost you more than the money you’ll save in interest by transferring.
Money transfer card
In the case of a money transfer card, you transfer cash straight to your current account, which you can then use to clear your outstanding balances.
However, unlike with a balance transfer card, a money transfer card gives you the option to consolidate other debts such as overdrafts and personal loans.
So, if you have a few different types of credit, this may be a suitable option as you’re not restricted to only paying off your credit card debt.
Just like a balance transfer card, there are options to snap up a 0% interest period. Again, this will depend on the lender and your financial circumstances.
And as with a balance transfer card, you’ll most likely need to pay a one-off fee to make the transfer. This can be up to 4% of the sum you’re consolidating.
What are the cons?
Although these cards can help you manage several lines of credit, the monthly payment is often less than the combined total you were previously paying.
This may mean you’re making repayments for longer - and if you’re charged interest, you could end up paying more overall than you would have if you’d stuck to your original agreements.
If you do decide to consolidate using any of the options above, remember to weigh up all your options to make sure you won’t be paying a lot more than you are now. This is particularly important if you’re not accepted for a 0% interest rate.
Once you consolidate your debts, make sure you keep on top of your new repayments. Not doing so will negatively affect your credit history.
And don’t be tempted to start spending on the credit cards you’ve cleared. If you do, you’ll have even more repayments to make – and these could become unmanageable.
Disclaimer: All information and links are correct at the time of publishing.