Are you wondering if consolidating your debt with a credit card is a good option?
We explore benefits and consequences of consolidating debt with a credit card.

Consolidating Debt with a Credit Card

Consolidating debt with a credit card might be a good option for you if you have multiple debts in different places. With the right card, it could turn out cheaper than other options, such as taking out a personal loan. Using a credit card also gives you the flexibility to choose how much to pay back each month.

In this guide:

Why do some people choose to consolidate?

One reason you may choose to consolidate your debt onto one credit card is that you have many debts in different places. This can make it difficult to keep track of what you owe and who to.

However, if you consolidate your debt onto one card then you no longer need to keep track of multiple debts as you only have to pay one monthly payment.

This can be beneficial because:

  • It’s a good way to shift existing debt
  • You can get up to three years or more interest-free

However, the negative consequences of this option are:

  • It can turn very expensive if the debt is not paid back in the interest-free period
  • Some balance transfer fees can be costly

Choosing the best balance transfer

A balance transfer is a process of moving what you owe from one card to another, usually because of better terms.

It is possible to look for cards that offer low-interest rates or even cards that offer a 0% interest on balance transfers. Many card providers offer 0% interest deals as a way of drawing in new customers.

Therefore, make sure you look at how long the deal lasts for as after the advertised period interest will be charged, which can be costly.

How costly is a balance transfer?

When you move your debt to a balance transfer card you will be charged a fee by the provider.  Often, this is a percentage of the amount you are looking to transfer.

A balance transfer card will only be cost effective if you make use of the 0% interest period.  Due to the lack of interest, you can stretch your money further meaning you can pay off your debt sooner.

However, if you haven’t cleared the debt by the time the 0% interest period is over, the balance transfer cards become expensive as you now have to pay interest.

As with all things, there are pros and cons of a balance transfer:

Pros:

  • All of your debts are in one place
  • One payment per month
  • Debt is more manageable
  • You could pay less interest
  • It could improve your credit rating

Cons:

  • Transfer fees
  • Penalty charge if you miss a payment
  • Annual percentage rate (APR) and limit based on credit score
  • High APR (after interest-free offer)

Is credit rating important?

Your credit rating is key if you want to get the best transfer deals as they are reserved for those with clean credit history and a high credit rating.

Lenders are only obliged to offer 51% of applicants their promotional offer rate. This means your credit rating must be perfect as they can afford to be choosy, leaving you with a worse offer or even worse, you could be declined.

Should you use a debt consolidation loan?

If you don’t feel that consolidating your debt with a credit card is the right option for you, you can always consider using a debt consolidation loan.

This is when you borrow enough money to pay off all your current debts and owe money to just one lender.