UK Credit Guide – Debt Consolidation


The phrase is often mentioned when discussions about debts or finances arise, but what does it actually mean? Essentially, debt consolidation is a way to combine some or all existing debts into one form of credit such as a credit card or loan. Say you have several credit cards, a car loan and an overdraft – meaning several payments due at different times, of different amounts and each with a different interest rate, it can be overwhelming.

As debt consolidation requires taking out more credit, it is definitely worth doing some research into interest rates or seeking financial advice to help decide if this is the best solution for you. One of the best ways to do this is to write down all of your current debts, their amounts and interest rates. From this you would be able to work out your total debt and when it can reasonably be repaid. You can then compare these amounts to taking out a debt consolidation loan or credit card to see which is more beneficial.

Things to factor into your calculation

  • The combined total amount you’re paying to your debts each month – is the new payment higher?
  • If it is, can you reasonably afford this increased amount until your debts are repaid?
  • The interest rates of all your current debts
  • Any special offer or fixed-term deals you have
  • Any early settlement or overpayment fees you might be charged to settle your debts.

Types of debt consolidation

Credit cards

Several credit card companies offer an opening incentive for customers who transfer their balance from other cards to the new card. This can be anything from a 0% transfer fee, fixed-term lower APR or even a fixed term 0% interest rate. While these can seem exciting, it is worth doing the maths to see which type of deal would be best for you based on your current credit. It’s also worth noting that balance transfers can only be done from one credit or store card to another, if you want to consolidate a loan, you’d need to do a money transfer instead which can involve additional costs.

Debt consolidation loans

Unlike credit cards, debt consolidation loans can be used to cover several different forms of credit. As the loan is usually paid out in cash to your bank account, the funds can be used to pay off credit cards, overdrafts and other loans. Loan companies often offer a range of interest rates which depend on the loan amount, so consolidating lots of debt into one loan might mean you qualify for a lower rate of interest. This could be beneficial if you want to consolidate lots of higher interest debt, though you should be certain the monthly repayments are affordable for you.

Pros
  • It’s easier to keep on top of and manage debts when they’re all in one place
  • Monthly payment could be lower than the combined payments of the credit being consolidated
  • Could benefit from better interest rates
  • Could help improve credit score in the longer term
Cons
  • Could mean it takes longer to pay off debts and you may pay more interest in the long run
  • Monthly repayment could be higher depending on the type of credit being consolidated
  • A credit check is often needed, so those with poorer credit might not be eligible or may be offered a higher interest rate.

Debt consolidation isn’t always the best solution to financial woes. Some people may benefit from a methodical repayment scheme such as the snowball method. You can also speak to Stepchange who offer free-impartial debt advice.

UK Credit does not provide financial advice. None of the articles contained within this website are intended to constitute financial advice and should be used for information purposes only. If you require financial advice, please contact your local Citizens Advice Bureau, Stepchange, or other independent advisors.