Should you consolidate your credit card debt?

Young student studying using mobile phone and holding credit card

Credit cards can be an efficient way to finance a large purchase, earn rewards or add an additional layer of security to your spending.

But if multiple credit cards are in use and repayments are missed, the build-up of interest and late fees can quickly start to feel overwhelming.

If you find yourself in this situation, you might be wondering whether debt consolidation will make it easier for you to stay on top of your card repayments. Here, we’ll talk through the basics of credit card debt and the options you might consider to take back control of your finances.

What is credit card debt?

Every time a person uses a credit card to pay for something, they are borrowing that money from the credit card provider.

All money spent using credit cards is therefore credit card debt. Each month, the account holder will receive a statement from the credit provider, outlining the debt on their account and the minimum repayment required for that month.

It can be a popular way of financing purchases, as the debt can then be repaid in smaller amounts over a longer period of time. You also won’t be charged any interest on your borrowing, as long as you repay what you owe in full each month.

However, debt can accumulate and increase via interest and penalties when the account holder does not meet the monthly repayment requirements.

Why is credit card debt a risk?

Credit card debt, like all debt, can quickly grow and become unmanageable if repayments are frequently missed. If you’re juggling multiple credit card debts, you may struggle to keep track of what needs paying and when. If a repayment does get missed, this could make it more difficult to keep up with your other repayments and cause a knock on effect.

In these circumstances, the debts will have a negative impact on your credit score, making it harder for you to borrow money in the future.

For these reasons, it’s important to be aware of your debts and consider your options before you start falling behind on your repayments.

Your options for consolidating credit card debt

Debt consolidation is the practice of taking out a new loan with a single lender, which you then use to pay off your existing debts and replace them with a single monthly payment. It can be an appealing option if you have multiple credit cards and find that you are having trouble staying on top of them.

Below are some of the finance options that might typically be suitable for consolidating your credit card debt, each with its own advantages, considerations and use cases.

Personal loans

Personal loans are unsecured loans that allow you to borrow without tying the debt to any collateral or assets like your home. If you’ve got a good credit score, you’re likely to be offered better rates.

As they are not tied to any assets, unsecured personal loan eligibility will depend on your credit score and the criteria of the lender.. They will typically have lower limits on how much you can borrow compared to a secured homeowner loan.

If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.

Homeowner loans

Homeowner loans are secured loans against your home, meaning that your home may be repossessed if you are unable to keep up with repayments. They allow you to borrow larger amounts and are less dependent on your credit rating, providing that you have suitable equity in your property.

Homeowner loans might also be an option to consider if you are seeking to spread the repayments out over a longer period of time.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Balance transfer card

A balance transfer card is a type of credit card that allows you to move the balance on one of your credit cards onto a new card, often for a small fee. They will usually come with a 0% interest period, meaning you do not have to pay interest for the first few months of owning the card.

Once the 0% interest period is up, you will be charged the card’s usual APR as interest on the remaining balance. You will still need to make minimum payments each month, but you can also overpay to reduce your debt.  

Should you consolidate your credit card debt?

Whether credit card debt consolidation is the right option for you will depend on your circumstances. Here are some common things to consider:

  • Do some of your cards have higher interest rates?
  • Do you struggle to keep track of what you owe?
  • Do your cards have different payment terms and dates?

If the answer to some or all of the above is yes, then debt consolidation might help you to manage your credit card debt.

If you find that you are frequently worried about rising debt, debt consolidation may not be the right solution for you. It may be useful to reach out to Money Helper, a government-back financial advice service, for further support.

Can you consolidate credit card debt without hurting your credit?

By consistently making the necessary monthly repayments to your debt consolidation loan provider, you should see your credit score improve over time.

In some cases, lenders may perform a ‘hard search’ on your credit report as part of your application process. This may temporarily lower your credit score at first.

Do you lose your credit cards if you consolidate?

There is no explicit requirement for you to close your credit cards if you choose to repay their debts with a debt consolidation loan. Ultimately, you should decide what is best for you and your circumstances.

If you find there is a strong risk of you being tempted to use them, and get back into debt, it may be worthwhile to consider closing the accounts once repaid.

On the other hand, closing lines of credit will bring your credit utilisation down and could negatively impact your credit score.

One of the most common ways to improve your credit score is to actively borrow and pay off credit. This  shows lenders that you are reliable. Therefore, it may be a good idea to keep a line of credit open once your debts have been paid off, then set a budget to use and repay it consistently on a monthly basis.

How to consolidate credit card debt

Once you are ready to consolidate your credit card debt, the process is relatively straight-forward.

1) Calculate how much you owe on each card

Review all of your most recent statements and total up the amount on each. You can contact the providers if you feel like any statements are out of date or if you’re having trouble finding a recent one.

2) Select a loan product and borrow that amount

Consider your options and then borrow the amount you will need to pay off your credit card debts. As a broker, we can help you to browse debt consolidation loan providers and find the right product for your circumstances.

3) Pay off your existing credit debts

Once you have received the funds, make sure to contact the credit card providers with which you have debt and take any necessary steps to pay off the amount owed in full.

If you are choosing to close the accounts once they have been paid off, you must contact the provider to request this. Clearing the debts and cutting up the card will not formally close your account.

4) Repay the debt in monthly installments

With the weight of your former credit card debts lifted, you now just have to focus on one monthly repayment. A good habit might be to set up a budget and transfer the monthly repayment shortly after your payday or any other recurring monthly income.

Looking to consolidate your credit card debt?

Take control of your finances and learn how Aro can help.

Explore our debt consolidation loan options

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