If you’re thinking of consolidating your debts, what’s the best way to go about it?
Read on to find out what your options are...
Debt consolidation can help you reduce the interest you’re paying and simplify your finances. It basically involves you borrowing money to pay off multiple debts, and then paying off this single debt in one manageable monthly payment.
So, if you have three credit cards and a store card, you could add together the balances you owe on each and borrow this sum to clear these balances. You would then only have to make one payment each month – to your new lender - and you’d have just one interest rate to keep track of, rather than several.
But what are your options if you’re considering debt consolidation?
Balance transfer card
If you have several credit cards and store cards, you could use a balance transfer card to pay off these debts. This is a card that’s specifically used to transfer outstanding balances from multiple other cards on to it. The balances on these cards will then be cleared, and you just have one repayment to make each month.
As well as making it easier to manage your money, a balance transfer card may also reduce the amount of interest you’re paying. Some of these cards come with a 0% interest period, and providing you pay off the entire balance within this time, you will not have to pay any interest. However, there may be a fee to transfer your existing credit card balances to this new card, so you will need to weigh up whether or not you will actually save any money once this is taken into account.
If your credit history is less-than-perfect, it’s unlikely you’ll be accepted for the best deals on the market, like 0% interest. However, you may still end up paying less interest each month that you are when you add up all the rates you’re currently paying – that’s why you’ll need to do your sums and see if it’s a move that will mean you pay less each month.
Balance transfer cards can be more affordable than juggling several cards because you pay back one large sum over a longer period. However, because it will take you longer to pay off, you may pay more interest overall – but it should be at a rate you can afford.
Money transfer card
A money transfer card works in a different way to a balance transfer card. Rather than you shifting your existing debts on to the card, you use it to transfer cash straight into your current account. You can then use this to clear the balance on several different credit accounts – a credit card and overdraft, for example.
Again, a money transfer card can come with an interest-free period, so if you think you can pay back what you borrow in this time, you could save yourself a lot on interest. However, there will also be a fee when you make the transfer, so you’ll have to work out whether this will mean you actually end up paying more by consolidating your debts.
The key advantage of a money transfer card over a balance transfer card is that there are more types of debt you can clear with it. In addition to paying off your credit card or store card debt, you can also use the funds to pay off an overdraft, personal loan or catalogue debt.
If you like things to be straightforward when it comes to your finances, a consolidation loan might be your preferred option. With a balance transfer card, as long as you make at least the minimum repayment each month, you can pay as much as you’d like towards clearing the balance. However, this means that you have no clear end to the debt in sight, and the fact that your monthly payments could change may make budgeting difficult.
With a consolidation loan, you apply for the exact sum of money you need – typically the cost of all your unsecured debts added together – and then make one fixed monthly payment. This makes it easy to manage your repayments.
And there is no temptation to spend more with a debt consolidation loan. With a balance transfer card, you could start to use it for spending, which means your balance might not go down and could even go up. With a loan, you borrow what you need to consolidate your debts and that’s it.
It’s also worth keeping in mind that interest-free balance transfer and money transfer cards are usually only available to customers with good credit histories. If you have had problems with credit in the past, you might not be accepted for a 0% deal and may be offered a higher rate of interest instead. Combined with any fees, this could make both these options a more expensive form of borrowing than you anticipated.
Ultimately, how you choose to consolidate your debts depends on your own situation. Make sure you carefully weigh up what each one offers and which most suits your needs.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.