Expert debt views & facts

Credit cards are a two-way thing: on the one hand, they are an extremely quick and convenient way of funding purchases. On the other hand, particularly if you are only making the minimum repayments, credit cards can be very costly.

The Telegraph measured the average credit card APR at 17.4% in August, and this figure has been consistently rising in recent months, despite two base rate cuts by the Bank of England. The credit crunch has meant that lenders can’t take as many risks as they did when the economy was booming – and that involves higher interest rates.

If you are careful to pay off your balance before the repayment period ends (usually at the end of each month), it’s possible to use credit cards without ever incurring any interest. If, however, you decide to spread the cost out over a few months, the interest can soon begin to add up.

If you find yourself in unmanageable debt on one or more credit cards, the consequences can be worrying: 17.4% APR means that over the course of a year, you will be charged an additional 17.4% on top of whatever you have spent. In this case, a debt consolidation loan could help clear your debt and reduce your outgoings.

When to choose debt consolidation
If you have a number of credit card debts, and you feel you may struggle to repay them anytime soon, you may benefit from a debt consolidation loan.

A debt consolidation loan will effectively settle the balances on your credit cards, after which you will be expected to repay the total amount to the new lender. These payments can be scheduled over a number of years, making them affordable – although the longer the repayment period, the more you will pay in interest.

That said, one of the main advantages of debt consolidation loans is that they usually carry a lower interest rate than credit cards and other high-APR forms of credit – so however long it takes to repay your debt consolidation loan, you will probably be paying less than you would have paid on the credit card itself.

When not to consolidate
Despite credit cards being expensive on the whole, there are instances in which it can be better to stick with the credit card repayments.

If you only have one credit card and/or you think your debts are manageable, it may be best to focus on paying that off without a debt consolidation loan. As long as you are able to keep up with a decent level of monthly repayments, and think you will be able to clear the debt in a reasonable amount of time (i.e. a few months), the monthly interest should not be too expensive.

Credit cards also offer flexibility. Whereas a debt consolidation loan will have strict monthly repayment terms, credit cards allow you to repay anything over the minimum monthly payment (normally a small percentage of the balance on your card). If you’re short of funds one month, you have the freedom to repay a smaller amount than usual, and pick up where you left off next month.