Tips for Tuesday: Can I use a credit card to consolidate my debts?


Tips for Tuesday: Can I use a credit card to consolidate my debts?

If you are struggling to repay debts it doesn’t just affect your finances, but also many other areas of your life and your own wellbeing. It can make you incredibly stressed, which can have an impact on your relationships with friends and family, and even your health.

The thing is, not facing your debt problem head on and taking the first step towards doing something about them means the situation will never improve – and it may even get worse if your lenders continue to add interest and charges to what you owe. Rather than let it escalate, it’s important to get on top of your finances as soon as you start to suspect you might be struggling.

If you have several different lines of credit and you’ve started to have difficulty managing them all, this is the first sign that you may be headed for a problem. Before you start missing payments, which will show up on your credit history, consider what you can do to make the situation easier to manage.

Debt consolidation

One early option is to consolidate your debts. Simply put, this means taking out a loan or single credit card and using it to pay off your other unsecured debts (such as store cards, personal loans and credit cards). You then have just one payment to manage each month.

In order to consolidate your debts you’ll need to borrow, so this won’t be the most suitable option for you if your finances have already started to spiral out of your control and you’ve missed some of your payments. This is because missed or defaulted payments leave a mark on your credit history and this can put lenders off approving your application for more borrowing – they may simply assume you already have enough to manage.

Reduce the cost of your debt

In addition to making your debts more straightforward to manage by replacing several payments with one, debt consolidation may also help you to reduce the interest you’re paying. You may not have an unmanageable debt, but it might be possible for you to reduce the amount of interest you’re paying on your existing debts. However, keep in mind that if you make smaller repayments over a longer period, you could end up paying more overall than you were originally because of the interest.

If you’re thinking of taking this route, start by checking your credit history through one of the credit reference agencies (Experian, Equifax and CallCredit). It’s important to make sure all the information they have about you is correct and up to date, as if it isn’t it could negatively affect your ability to get new credit.

How can I consolidate my debts?

If you’ve decided to go down the route of debt consolidation, you may be wondering how best to do it. One option is to use a balance transfer credit card to consolidate your individual debts.

Some of these cards come with an introductory offer of 0% interest, which can make your debts much cheaper. But even if you don’t qualify for these deals, there is likely to be a credit card provider who can cater to you. You could also speak to your existing credit card lender to see if it’s possible to switch to a better deal.

An alternative to using a credit card to consolidate your debts is to take out a personal loan. You can use this to pay off your other unsecured debts and then pay this off in single monthly payments.

A word of warning

If you decide to consolidate your debts it’s important you don’t borrow any more than you need to in order to pay off what you already owe. Although it may seem easier to manage your new payments, if you take out more you could soon end up back at square one – but because you’ve borrowed more than you had originally, you may find it very hard to consolidate again. As a result, your credit history could be negatively impacted and you might find it difficult to keep on top of your other financial commitments.

You should also note that if you repay what you owe over a longer period of time when you consolidate, while this may mean that your monthly payments are lower and more affordable, bear in mind that because you are paying for longer you may well end up repaying more overall. 

If you choose to use a secured loan, or even remortgage, to consolidate your debts remember that you’ll be turning unsecured borrowing into secured borrowing – that is borrowing that is secured against your home. This means that if you fall behind with your repayments your home could be at risk.

To find out more about debt consolidation, click here.