Debt consolidation for credit cards

Credit card balances are a form of unsecured debt. Carrying more than one credit card debt means you may be paying different rates of interest on each of them - making it difficult to calculate when you'll repay them in full.

Here, we will look at the advantages of debt consolidation loans for credit card debts, as well as balance transfer cards.

A debt consolidation loan for credit card debts

You could consolidate your credit card debts into one personal loan. The advantages include:

• You would have one monthly payment.
• You may find a debt consolidation loan with a lower rate of interest than your credit cards.
• You would have a clear idea of when you will have repaid the loan in full.

When taking out any kind of loan, consider whether you have a regular income to make the repayments in full every month, for the length of the loan. You should only take out a debt consolidation loan if you're sure you can afford the repayments.

Comparing credit cards with debt consolidation loans

Credit cards offer flexibility - you can choose to repay more (without a fee) or just make the minimum repayments on a monthly basis. With a debt consolidation loan, you'd commit to one fixed amount every month.

If you commit to repaying a fixed amount every month with a debt consolidation loan, you could pay less interest overall and clear the balance more quickly. If you only make minimum repayments on a credit card, it could take far longer (and cost more) to clear the debt for two reasons: a significant amount of the minimum repayment goes on interest, and the rate of interest could also be higher with a credit card.

Example

A £5,000 credit card balance with an 18.5% APR (Annual Percentage Rate) and minimum repayment of 5%.

If you only made the minimum monthly payment:

• It could take over 11 years to repay in full
• The minimum payments would range from £250 at the start to £5 towards the end
• It could cost over £2,000 in interest.

If you took out a debt consolidation loan of £5,000 with an APR of 10%:

• It could take 5 years to repay in full
• There would be a fixed monthly payment of just over £100.
• It could cost over £1,300 in interest.

A balance transfer card

If you're carrying multiple credit card debts, an option might be to consolidate your credit card debts onto one credit card, leaving you with one monthly credit card payment.

If you decide to do that, a lower-cost option might be a balance transfer credit card which would charge you 0% interest for a fixed period. You wouldn't be charged any interest at all as long as you repaid the full balance within the introductory period.

Your ability to obtain a balance transfer card would depend on your credit history (credit cards require a credit check). It could also depend on your ability to repay any other debts, such as an overdraft or personal loan. Some zero percent credit cards are only available if you have an income above a certain threshold.

The zero percent interest on a balance transfer card is not forever, but at the end of the 0% period, you might be able to transfer the balance to another balance transfer card, if you've not been able to repay it in full in time.

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