If you have multiple credit cards and are struggling to keep control of your debts, then consolidating them all into one place could be a good idea. Consolidating your debt involves taking out a new card and transferring all of your existing balances into one place.
Why should you consider consolidating and how do you go about doing it? We’re here to break it down for you.
If you have multiple credit cards with outstanding balances, the costs can start to add up. Unless you have a promotional deal in place, the likelihood is that your debts will be incurring interest charges based on each card’s standard rate. With the average APR for credit cards currently at 24.7% – the highest it’s been since June 2006 – your debts may be incurring interest charges that you are just not in a position to repay. And the longer an outstanding balance remains on a card, the bigger the debt becomes, as compounded interest means that you are incurring interest on your previous interest. As you can imagine, it’s very easy to end up in a spiral of debt.
Meanwhile, if you have multiple credit accounts open, this could negatively impact your credit score. Credit rating agencies take into account how much outstanding debt you have and how much credit you already have available to you. Having multiple credit cards with outstanding balances on them could be a black mark on your report. Similarly, it can be hard to keep track of payments if you have multiple credit cards to consider. Any missed payment would mean a black mark on your credit score and could make obtaining credit in the future that much harder.
The simplest way to consolidate your debt is to take out a balance transfer card. These are credit cards that allow you to transfer existing balances onto one card so that they are all in one place. The advantage to this is that if you choose the right deal, your interest payments are likely to be lower, and you will now only have one balance to pay off.
When choosing a balance transfer card, consider the length of the interest-free period on offer, as this will be how long you have available to pay off your debt in full. If you couldn’t pay it off before the end of the introductory offer, then you would be back to where you were before the transfer, incurring interest at the card’s standard rate.
Also, check if the new card has a balance transfer fee. This is a fee that the card provider charges you to transfer your debt over. Typically, it’s around 3%, so if you are transferring a balance of £1,000, you will have to pay £30 in fees. If you are having to make multiple transfers, this may add up, so look for cards which have lower fees or, even better, no fees at all.
Another thing to take note of is the transfer window that the card gives you. For some cards this is around 90 days, while for others it is shorter at 60 days. Ensure that you transfer your balances during this window, otherwise you may find you are unable to.
One final thing to be aware of is any restriction your chosen balance transfer card has on where you can transfer balances from. For example, if you choose an HSBC balance transfer card, you won’t be able to transfer a balance from your M&S Bank credit card because they are part of the same banking group.
Debt consolidation is not without flaws. If you have persistent credit card debt, then it may be prudent to consider all your options and get free and confidential advice before committing to debt consolidation.
While there are positives in that it puts all your debt in one place – and in the best case scenario reduces the interest you are charged on your balances – there are also some pitfalls. The best balance transfer deals are often saved for those with a good credit score. Lenders are only obliged to offer 51% of applicants their advertised promotional rate, meaning that if your credit score is less than ideal, you may be offered a worse deal or even be declined for the card, which would end up further hurting your score.
For debt consolidation to work, you must be focused on paying off your outstanding balance; otherwise, you risk interest charges further down the line. So, once you have transferred all your balances, it is best to close those credit cards down. Doing this will potentially improve your credit score and it will also remove the temptation to spend on those cards. Also, do not be tempted to spend on your new card. Debt consolidation is all about paying down your debt, not adding to it.