Are you juggling a variety of credit cards or paying debts off to a number of different lenders?
Keeping track of your finances can become confusing when you’re making lots of different payments. Each credit card may have a different balance and a different payment date, making it tougher to manage your money.
All this can quickly become overwhelming. That’s where debt consolidation could help by streamlining all of your payments into one manageable outgoing. But if you’re planning to consolidate your debts, is a credit card or a loan more suitable for you situation?
Consolidating your debts
Debt consolidation can alleviate the stress of dealing with all those different lenders and help simplify your finances. If you have three or four credit cards, you could move their balances over on to one single credit card, so you only have to make one payment.
This means you borrow the amount needed to clear your existing balances (whether on loans, credit cards or a mixture of both) and make a single payment to your new lender each month. Now you have just one interest rate to keep track of rather than the several you had before. As with all types of borrowing, it is vital that you keep up with your payments as if you don’t you could be hit by charges and your credit history will be damaged.
With a credit card, you must make at least the minimum monthly payment. If you clear the balance in full, you won’t have to pay a penny in interest. Loans differ slightly as you are given a set monthly amount to pay back, and this doesn’t change.
Borrow smart, balance transfer
If you have a few credit cards and store cards, you could take advantage of a credit card that comes with 0% interest on balance transfers for a fixed period. Be mindful that many lenders will charge a one-off fee for this balance transfer, so work out whether you’ll still save money after this has been paid.
This interest-free period means you can focus on clearing your entire balance without worrying about it growing because of the interest. Just remember to aim to clear your debt before this interest-free period ends, as the standard rate you’ll be put on afterwards may be high.
For those with a less-than-perfect credit history, you may struggle to get accepted for the best 0% balance transfer credit card offers on the market. There may be other options out there, but they could have a much shorter 0% interest period than those available to people with good credit histories, or they may come with a higher fee.
In some cases, you might be able to find a balance transfer card with a lower interest rate than the combined interest you’re paying on your current cards - but this isn’t always possible. If your credit history has improved by quite a bit since you took out your current cards, it may be more likely that you can find a credit card with a better rate.
If you do decide to take out a balance transfer card, it’s important to remain in control of your spending as well as your payments. Your main aim with this card is to reduce your debts, so avoid impulse purchases and unnecessary spending that could increase your owed balance further.
Money transfer card
This card works differently to a balance transfer as you shift cash directly into your current account, rather than moving your credit card debts over.
To consolidate your debts, you can use this money to clear the balance on your credit card or loans. The advantage here is that you are not restricted to just paying off your credit cards or store cards, but you can also pay off other debts such as catalogue debt, an overdraft or a personal loan.
Again, you might be able to find a money transfer card with a 0% period. Work out whether you’ll be able to pay back what you borrow before that period ends to see if the savings on interest will make it worthwhile.
As with balance transfer cards, there is a fee for withdrawing cash from a money transfer card, so it’s worth doing the maths to work out if you’ll actually end up paying more to consolidate your debts this way. And remember, you’ll likely be charged a higher rate of interest if you don’t clear the balance before the 0% interest period ends.
Debt consolidation loan
The advantage of a debt consolidation loan over a balance transfer card is that the loan is paid off over a fixed amount of time, so you know when you’ll be debt free. As you’re given the cash, you can use it to clear the balances on any of your other credit cards or loans.
With a consolidation loan, you won’t be able to borrow more halfway through paying your balance off like you could with a credit card. This is because the loan amount is fixed and you pay it off in monthly instalments until the balance is cleared, along with the interest.
Remember, there’s no guarantee that the loan will be cheaper in the long-run than paying all your debts off separately. But it does reduce the chance that you’ll miss a payment and be hit with costly charges that mean you’re repaying for longer. Having just one payment to make each month can make things much easier to manage.
Ocean offers both secured and unsecured loans suitable for debt consolidation. To find out more, and how to apply, head here. Like with any borrowing, it’s important that you keep to your lender’s schedule and meet your monthly repayments. Not doing so can cost you further and damage your credit history, which can make it more difficult to borrow in the future.
Disclaimer: All information and links are correct at the time of publishing.