How do I consolidate my credit card debt?

How does credit card debt consolidation work?

Credit card debt consolidation is where you combine all of your debts into one. It allows you to have one debt that you pay off, rather than multiple debts at the same time. Essentially, you take out a new line of credit to clear your existing debt. There are four main ways to consolidate credit card debt: 

1. balance transfer - is where you transfer the balance of different credit cards onto one single credit card
2. money transfer card- lets you move cash directly into your current account which you can then use to clear your existing credit card balances
3. debt consolidation loan - is specifically designed for you to pay off your existing debts and then have one loan to pay off
4. personal loan - can cover your existing debts so that you have one loan to pay off. This type of loan usually offers a fixed interest rate and requires you to pay a set amount per month over a definite period of time 

Is credit card consolidation the best option for me?

That depends on your personal financial circumstances. There are pros and cons to credit card consolidation that you’ll need to consider in order to make the best decision for you.

Pros to consolidating credit card debt:

• consolidating your debt allows you to have one simple monthly repayment, instead of keeping up with different payments. You may find it easier to keep track of one monthly payment instead of several different ones
• if you move your debts onto a credit card with a low interest rate or 0% interest introductory period, you may end up paying less overall than you were previously
• with a money transfer card, you can choose where the cash goes – a useful way to consolidate other types of debt (like a loan or overdraft) at the same time
• if you find a loan with monthly payments that are more manageable than the repayments you’re making at the moment, you could consolidate your debt to avoid incurring late fees and charges

 Cons to consolidating credit card debt:

• depending on the amount of debt you currently have, you may find it difficult to be accepted for a credit card or loan with a low interest rate
• when using balance transfers you could end up paying more interest and fees on a single card than you would on multiple cards
• some credit cards charge a balance transfer fee, so make sure you do your research and check the terms and conditions before applying for a card
• If you are offered a 0% introductory offer it means you won’t have to pay any interest for a fixed period However, once the deal ends, interest will be applied. So, it’s best to clear it in full beforehand. These deals are usually reserved for customers with high credit scores

Whether you consolidate your debts into a loan or use balance transfer cards, you’ll have to make sure that you’re able to meet the monthly repayments. Otherwise, you could end up spiraling further into debt. 

How to search without marking your file

Applying for and being rejected by different types of credit will damage your credit score because every time you apply for credit, your credit history is marked by a hard search. The more times you apply, the more likely it is that lenders will view you as desperate to borrow, which may put them off.

A sensible way of shopping around is using an eligibility checker. You can browse between deals to find a credit card or loan that you are likely to be eligible for without damaging your credit score. You can also use a QuickCheck tool to see if you’re eligible before you apply.

How to reduce the risk of further credit card debt

You should think carefully before consolidating your debts. Having just one monthly payment can make your finances more manageable. Bear in mind that lenders typically offer better interest rates to those with a good credit history – borrowing over a longer period might mean that you actually end up paying back more overall. Late and missed payments will leave a negative footprint on your file and this can affect your consolidation options.

The best way to reduce the risk of further credit card debt is to make sure you meet your monthly payments on time and in full. If you can’t meet them in full, you should at least pay back the minimum amount each month.

If you’ve gone for the balance transfer option, don’t use the card to spend any more money. Destroy the card so you can’t use it if you’re worried about being tempted.

What help is available?

If you're beginning to struggle with your credit card payments, you should act quickly to avoid your credit history being affected. Consolidation might not necessarily be the right move for you. There are other options you could explore, such as debt relief and debt management plans.

Debt relief order

A debt relief order (DRO) is a debt solution that can help if you can’t pay your debts and you: 

• owe £20,000 or less
• don’t own your home or any other large assets (if you have given any away in the last two years your DRO application may be rejected)
• have very little spare income - normally under £50 per month
• have lived or worked in England or Wales in the last three years
• aren’t going through any other formal insolvency procedure and haven’t had a DRO in the last six years

With a DRO, your creditors cannot recover the money you owe them without the court’s permission. You are normally freed from your debts after 12 months. 

However, you’ll be subject to restrictions for 12 months and the DRO will stay on your credit record for six years, which could seriously affect your credit score and ability to get finance in the future.

You’ll also need to tell your bank or building society about your debt relief order if you want to open an account with them and inform any lenders if you want to apply for more than £500 credit with them. Make sure you consider all the consequences before perusing this option. 

Debt management

You can apply for a debt management plan if you are struggling to pay your debts. This is where you use a licensed debt management company to set up a payment plan with your creditors. The company acts as an agent for both you and your creditors by collecting monthly repayments from you and sharing it among your creditors. Some companies take a fee, but you can also get free debt advice from charities like StepChange.

You can apply for a debt management plan if you:

• can’t afford to pay the full amount that you’re required to pay your creditors each month
• but are able to afford to make reduced monthly repayments to your creditors each month

This option could be the best one for you if you are struggling to manage your debts. Make sure that you fully understand the costs involved before choosing this path. And bear in mind that if you pay less than the agreed monthly amount, this will affect your credit score – even if you are on an agreed debt management plan.

You can use our card to help rebuild your credit score by making regular repayments on time and staying under your limit. Not using your card responsibly, however, may harm your credit score.