Is it a good idea to consolidate credit card debt?

Consolidating your credit card debt is a way to move it all into one place. Swapping multiple repayments, interest rates and lenders for one monthly payment can make your debt more affordable and even help you to reduce it faster - but only if you’re able to make the repayments.

6 min read
worried woman holding credit cards

How does credit card debt consolidation work? 

Consolidating your credit card debt is essentially a way of moving it all to one place. Once it has been consolidated, you can pay it back with single monthly repayments, rather than having to make multiple payments to different lenders.

There are two main ways you can do this:

  1. debt consolidation loan
  2. balance transfer credit card

1. Debt consolidation loan

A debt consolidation loan allows you to borrow money to pay off your existing debts. Then you merge all of the money that you owe across different lenders into one place, which makes it easier to budget.

There are two types of debt consolidation loan: secured and unsecured. Secured loans are tied to your property, which means if you fall behind on your repayments, your property could be put at risk.

However, with this extra layer of security behind the lenders, you may find it easier to get approved for larger sums of money compared to an unsecured loan (which isn’t tied to any assets).

2. Balance transfer card

Balance transfer credit cards work in a similar way to a debt consolidation loan, but you shift your debt onto a credit card instead of clearing it with a loan.

Balance transfer credit cards come with the benefit of having a single interest rate and a single monthly payment, just like debt consolidation loans. If you’re eligible for a 0% introductory rate on a credit card, it could save you money on interest – as long as you clear the balance before the offer ends.

Can I transfer my credit card balance to my mortgage? 

While you can use your mortgage as a way of consolidating credit card debt, it shouldn’t necessarily be your first port of call.

Borrowing money on your mortgage may seem like a sensible idea, as it often appears cheaper due to lower interest rates, but it doesn’t always work out that way.

What are the main risks involved?

It isn’t just the price though, there are also some big risks that come along with borrowing on your mortgage.

1. Your home is used as collateral

One of the main risks is that you’re putting your home in danger. Similar to secured loans, your mortgage is secured against your house. This means that failing to make all of your repayments could result in the loss of your home.

As credit cards are an unsecured way of borrowing, transferring that debt into your mortgage is effectively transferring the finance into a secured way of borrowing, which means that your assets (in this case, your house) could then be at risk if you don’t pay.

2. You may end up paying more

The other main risk is that it may work out more expensive to consolidate your debt in this way. For example, while borrowing £10,000 on a mortgage  with a 5% interest rate sounds much cheaper than a loan with an 18% interest rate, it doesn’t necessarily mean it is.

That’s because the length of the repayment period affects how much interest you end up paying. So, if you’re paying that 5% for 25 years, versus 18% for five, the former works out more expensive in the long run.

Borrowing against your mortgage should generally be a last resort, but there are other ways to effectively consolidate your credit card debt – we’ll discuss these below.

Benefits of consolidating credit card debt

1. Putting all debt into one payment

Consolidating your credit card debt can make repaying it more manageable. This is because you don’t have to juggle multiple repayments with multiple interest rates to different lenders. Instead, you just have a single repayment to factor into your budget.

2. More affordable

It can also make your debt more affordable, as you have just one interest rate as opposed to having several different ones, each having the potential to vary and/or increase over time.

3. Pay off debt quicker

As well as this, consolidating your credit card debt can have the potential to get you debt-free faster. By consolidating, you’re potentially reducing the amount of overall interest you have to pay on your debt (if you can find a more competitive rate than you’re currently paying). The less interest added to your balance, the quicker you’ll be able to pay off your debt. 

Factors to consider before consolidating credit card debt

While there are benefits to consolidating credit card debt, you should still take the time to carefully consider whether it’s the most suitable option for your personal circumstances.

1. Can you commit to the repayments?

Before taking out any kind of finance, you should be sure you can commit to the monthly repayments, and debt consolidation is no exception. A balance transfer card or a debt consolidation loan will still need repaying on time and in full, just like credit card debt.

If you can’t make the monthly repayments your credit score will be negatively affected and, if you have a secured debt consolidation loan, the assets against which the loan is secured could be at risk.

Tip: Before considering consolidation, make a list of all of your income and outgoings - and create a comprehensive budget.

2. Will the consolidation make your debt more affordable?

Another important thing to consider is whether consolidating your credit card debt will, in fact, make it more affordable.

In some cases, it can reduce the amount of interest you’re paying on your debt, making it cheaper in the long run. However, this isn’t guaranteed to be the case, particularly as you may face charges to transfer your debt (in the case of balance transfers) or early repayment fees (if using a loan to repay debt off early).

Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.

3. Do you have a strategy to keep you out of debt?

This may be one of the most important things to think about before going ahead with consolidating your credit card debt. Just because it can make your finances easier to manage, doesn’t mean debt consolidation will keep you out of debt forever. So, it’s best to create a strategy to make sure you don’t get into more debt in the future.

Creating a budget, cutting down on unnecessary spending, and regularly checking your outgoings are great ways to keep on top of your money.

Alternative ways to pay off credit card debt 

Consolidation isn’t the only way to help you pay off your credit card debt. Here are a few other options.

Ask for a lower interest rate

It may sound a little bit strange, but you are allowed to ask your lender to reduce your interest rate – and, if you have a good payment history with your lender, they may well agree. However, this is down to their own criteria and discretion.

If they say no, it won’t harm your credit score, but if they say yes, it could make your repayments more affordable - and help you clear your balance quicker.

Budgeting

We know this one is easier said than done, but revisiting your budget can be a good way to get back on track when it comes to repaying debt. Your budget will change with your finances, so it’s worth updating yours regularly to make sure it’s up to date and accurate.

You may find there are some regular payments that you no longer need (like multiple streaming services, for example), or that could be reduced. Making the smallest savings elsewhere can help you repay your debt faster and give you more peace of mind.

Snowball method

Not quite as fun as it sounds, but a good way to focus on repaying your debts. It’s called the snowball method because you pay off your debts one at a time – starting with the smallest first.

You gather momentum by using the money that’s left once each one is paid off to add to the repayments for the next one. So, each time you fully repay a debt, you’re adding more money to the pot for the next biggest one. You continue in this way and work your way up until you’ve paid off all of your debts.

Tip: Remember to pay at least the minimum repayment on all your accounts whilst you focus on clearing the smallest debts off. Otherwise, if you pay less than the minimum, you will face interest and charges and your credit score will be affected.

Read on for more tips for paying off debt

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Intelligent Lending Ltd is credit broker, working with a panel of lenders. Homeowner loans are secured against your home.