Credit card debts can often be expensive. With average interest rates standing at
around 16-18%, it’s no wonder that so many people choose to consolidate what they
owe.
There are many benefits to consolidating debt. However, do remember that it’s an
approach that’s only really suitable for people with manageable debts, as it doesn’t
address any underlying problems with the borrower’s finances.
How debt consolidation can help with credit card debts
Combines all your debts into one
Dealing with multiple debts can be confusing and time-consuming, so you may find
combining them into one can make things much simpler. You’ll only have one debt to
deal with, one lender to pay and one interest rate.
Could reduce your monthly payments
If you wish to reduce the amount you pay each month, you may be able to repay your
new debt over a longer period of time than your original debts, thus making each
payment smaller.
Of course, this means you will be repaying your debt for longer, and you may
therefore pay more interest than you would over a shorter repayment period.
Could reduce the total amount of interest paid
If your new interest rate is lower than the rates on the original debts you’re
consolidating, you could save money in the long run, even if you choose a longer
repayment period. But the longer the repayment period, the lower the chance of
saving money in this way.
Ways to consolidate credit card debts
Debt consolidation loan
Quite simply, a debt consolidation loan is used to pay off your existing debts, so that
all you owe is the new loan. This will then be repaid in the same way as any regular
loan – in fixed monthly payments over an agreed repayment period.
Read more on debt consolidation here.
0% balance transfer credit card
Some credit cards offer an interest-free period on balances transferred from other
cards. As such, if the majority of your debts are on credit cards, a 0% balance transfer
card could be the way forward.
The interest-free period will be limited, though, so to make it really worthwhile you
must be able to repay everything before it expires. Typical interest-free periods tend
to last between 12 and 16 months.
Remember that as with any credit card, you will have to make at least a minimum
monthly repayment (often around 3% of the outstanding balance), and there will
usually be a one-off balance transfer fee of around 2-5% of the balance transferred.
