When credit card debt starts to pile up, it can feel scary. Outstanding balances and compounded interest can quickly lead to debt problems that feel unmanageable. One possible solution is consolidating your credit card debt, but is it a good idea?
First things first: if you are having issues with debt, it’s best to talk to a non-profit debt advisor. For more on getting out of debt take a look at our guide.
Consolidating credit card debt can take two forms: an interest-free balance transfer credit card or a debt consolidation loan. To take out a balance transfer card, you typically need to have a ‘good’ credit score. If this option is of interest, check out our article breaking it down for you.
However, if you are more interested in a debt consolidation loan, let’s take a look whether this is a good idea and the steps you need to take to get one.
When does debt consolidation make sense?
Consolidating your credit card debt with a debt consolidation loan means that you will then only have one lender to repay on a monthly basis. Your credit cards will be paid off with your loan, and you can focus on making one monthly repayment.
Whether or not a debt consolidation loan is a good idea depends on your personal circumstances. Here are some scenarios in which it could make sense:
- When taking out the loan reduces the overall amount you need to pay back. One thing to consider when taking out a debt consolidation loan is whether you will end up paying less than before. While your monthly repayments may drop as a result, you could find that due to set up charges and the length of the loan you actually end up paying more in the long run.
- When you use it as an opportunity to cut your spending and get back on track. You will only really feel the benefit of this type of loan if you cut up your credit cards after you have transferred the debt. If you don’t, and keep spending on them, then you could end up racking up even more credit card debt.
- When you can afford to keep up the repayments until the loan is repaid. If you take out a secured debt consolidation loan and don’t keep up with your repayments, you risk losing your car or home. So if you think something in the future may mean you won’t keep up with your repayments – such as interest rates going up or a lack of security in your job – then a debt consolidation loan probably isn’t a good idea.
How can you consolidate your credit card debt?
If you think it is a good idea to consolidate your credit card debt, then your next step is to work out what you owe. Basically, this is what your outstanding debts are in total including interest. This will allow you to have a better understanding of your situation when you are comparing whether or not debt consolidation will save you money.
Then it is best to contact a non-profit debt advisor from somewhere like the StepChange debt charity or the Citizens Advice Bureau. They will be able to advise whether debt consolidation is a good idea or whether there are other options available to you that may make more sense.
After that, if you still want to go ahead with a debt consolidation loan, then you can use comparison sites or apply directly to one of the high street banks*. Make sure you check the interest rate and any loan fees in order to understand the total cost. Some comparison sites will also have an eligibility checker, which will conduct a ‘soft search’ for you, which won’t impact your credit score.
*Due to the ongoing coronavirus situation, some lenders have decided to temporarily stop offering loans. You may find that there are fewer loan options than normal.
