Debt consolidation can help you simplify your debts and make your finances easier to manage. But what exactly is it and how does it work?
In this blog, we’ll take you through the ins and outs of debt consolidation. You’ll then be able to make an informed decision about whether it’s the right move for you.
Make it easy on yourself
If you have several different forms of credit – a credit card, overdraft, personal loan and store card, say – and each has a different payment due date and a different interest rate, you’ll know how hard it is to keep track. The problem is if you miss a card or loan repayment, or you go over your agreed overdraft limit, the consequences can be serious.
Missing a loan repayment or a credit card minimum payment causes damage to your credit history. You may even end up being charged by your lender for missing the payment or making it late.
If you have an overdraft and you go over your agreed limit, things can also get pretty costly. You could be charged as much as £10 a day for each day that you’re in your unauthorised overdraft – and that can quickly add up.
So, as you can see, it’s vital that you keep track of all your credit agreements and when you owe payments on them. However, when you’re juggling different dates, balances and interest rates, this can get tricky.
That’s where debt consolidation comes in. This is a way of consolidating your debts using either a credit card or loan so that you only have one payment to make each month and only one interest rate to remember – if there is one.
You can use the money from the loan to clear the balances on your existing credit and store cards and to pay off your overdraft and any loans you have. You then make just one payment a month towards the balance on your debt consolidation loan.
Because your repayments are typically spread across a longer time than a smaller loan would be, you may find that they are more affordable than what you were previously paying. Just be aware that because you’re making repayments for longer, you may end up paying more interest than you would have originally.
Balance transfer card
A balance transfer card is a type of credit card that lets you transfer the outstanding balances on your existing credit and store cards – but not your loans or overdraft. You then make just one repayment each month towards clearing the debt on the card.
Some balance transfer cards come with an introductory offer of 0% interest for a certain time. If you clear the balance on the card within this window, you won’t have to pay any interest. This can mean you end up saving money when compared to your original agreements.
Be aware that there is usually a fee to transfer your balances over. You’ll need to think about whether this will end up costing you more than you’d save on interest.
Again, there is usually a fee when you make the transfer. You may find a money transfer card that comes with a 0% interest window, so work out whether this will save you money even with the transfer fee included.
When you use a money transfer card – or a debt consolidation loan, for that matter – you may feel tempted to borrow more than the outstanding balance on your lending. However, only do this if you know you can afford the repayments, as this will make the debt larger.
Applying for debt consolidation
Every lender has its own guidelines when it comes to deciding whether to accept your application. You can find out more about some of the things they look at here and here.
One of their considerations will be your credit history. This is a list all the credit agreements you’ve made over the last six years, including any credit or store cards, loans or mobile phone contracts you’ve signed up to. It also shows how well you’ve managed these – whether you’ve made your repayments on time, missed payments or entered into a formal debt solution, for example. If your credit history is in a less than perfect state, you may not get the deal you want, or you may be turned down altogether.
Lenders will also look at how much money you have coming in each month so they can be sure you’ll be able to afford the repayments. This is something you need to consider to.
Once you’ve cleared your existing cards, it can be tempting to start spending on them again. However, if you do this you’ll be right back to square one – with several different payments to keep track of. Plus, you’ll be adding more debt to the ones you’re trying to pay off, and this could make your repayments unmanageable.
We hope this blog has answered any questions you had about what debt consolidation is. You’ll find plenty of useful tips about finance on our blog, so keep checking back.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.