How to consolidate credit card debt

What is credit card consolidation?

Credit card consolidation means combining multiple credit card debts into one single payment. Instead of managing several different cards, you move all your debt to one place.

You can consolidate credit card debt in a few different ways:

• Balance transfer credit cards let you move debt from multiple cards onto one new card, often with a lower interest rate or 0% introductory period.
• Debt consolidation loans give you money to pay off all your credit cards at once. You then repay the loan in fixed monthly instalments.
• Remortgaging if you’re a homeowner can provide additional funds on top of your existing mortgage to clear larger credit card balances.

The goal is to make your debt easier to manage and potentially cheaper to repay. Remember, although your monthly payments may reduce, you could pay more overall due to interest if you extend the length of your borrowing.

What is the best way to consolidate credit card debt?

The best method depends on your personal situation, but here are the most effective options available:

Balance transfer credit cards

Balance transfer credit cards are often the cheapest way to consolidate debt. Many lenders offer 0% balance transfer deals for periods ranging from 12 to 36 months. During this time, you pay no interest on the transferred debt. You will typically pay a balance transfer fee of 2-3% of the amount transferred.

To make the most of a balance transfer card, you need to pay off the debt before the 0% period ends. If you don't, the interest rate will jump to the card's standard rate, which can be quite high.

Personal loans

A personal loan can give you a fixed interest rate and a set repayment period. Their rates are usually between 3% to 30% APR. The rate you get will depend on your credit score and the amount you're borrowing. You'll know exactly how much you'll pay each month and when the debt will be cleared.

Personal loans work well if you prefer the certainty of fixed payments or if you can't qualify for a good balance transfer deal.

Remortgaging or secured loans

If you’re consolidating a large amount of credit card debt, you could consider remortgaging or applying for a secured loan. They allow you to borrow against your home's value, but you must be a homeowner to apply for either of them.

They usually have lower interest rates but can put your property at risk if you can't keep up with payments.

Does credit card consolidation affect my credit score?

Credit card consolidation can affect your credit score in both positive and negative ways, depending on how you handle the process.

• Short-term effects might include a temporary dip in your credit score. When you apply for a balance transfer card or loan, lenders perform a hard credit check. This can lower your score by a few points for several months.
• Long-term benefits often outweigh the short-term impact. Consolidating debt can help you pay it off faster, which reduces your credit utilisation ratio. This ratio compares how much credit you're using to how much you have available. Lower utilisation typically improves your credit score.

If you pay on time, each time, and don't build up new debt, debt consolidation can improve your credit score over time. However, if you miss payments or default on your debt consolidation loan, your credit score may drop.

Can I consolidate my debt with bad credit?

You can still consolidate debt with bad credit, though your options may be more limited and expensive.

• Balance transfer options exist for people with poor credit, but you'll likely face higher interest rates and shorter 0% periods. Some specialist lenders offer balance transfer cards specifically for people rebuilding their credit.
• Personal loans are available from some lenders even with bad credit. However, you should expect higher interest rates.
• Guarantor loans involve having someone with good credit co-sign your loan. This can help you access better rates, but it puts the guarantor at risk if you can't make payments.
• Secured loans use your home or other assets as security. This means you could be accepted, even if you have bad credit. However, your property could be possessed if you can’t keep up with repayments.
• Credit union loans can sometimes have more competitive rates than high-street lenders for people with poor credit. Credit unions are member-owned and may be more willing to work with you.

Before consolidating with bad credit, make sure the new arrangement works for your current situation. Sometimes, the high interest rates on bad credit products can make consolidation more expensive overall.

Should I consolidate my credit card debt?

Consolidation isn't right for everyone. Consider these factors to decide if it's the correct choice for you:

Consolidation makes sense when:

• You're struggling to keep track of multiple payments and due dates.
• You're missing payments or only making minimum payments on high-interest cards.
• You can qualify for a significantly lower interest rate than you're currently paying.

Consolidation might not help if:

• You haven't addressed the spending habits that created the debt in the first place.
• You're likely to run up new debt on cleared credit cards.
• You're already paying low interest rates.
• You can pay off your current debts quickly without consolidating.

Add up all fees, interest charges, and the total amount you'll pay over the life of the consolidation option. Compare this to what you'd pay by keeping your current arrangements.

How can I avoid further credit card debt?

Debt consolidation can be a good first step to cutting down on your debt. The next step is building habits that keep you debt-free for good. Here are some steps to get you started:

• Create a realistic budget that accounts for all your income and expenses. Track your spending for a month to understand where your money goes. Many people find budgeting apps helpful for this.
• Build an emergency fund to cover unexpected expenses without using credit cards. Start with a small goal, then gradually build up to three months of expenses.
• Automate your savings by setting up standing orders to move money to savings accounts before you can spend it. Treat savings like a bill that must be paid.