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.

Why consolidate debt with a credit card?

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.

Benefits of consolidating debt with a credit card

There are many benefits of consolidating your debt using a credit card:

• It’s a good way to shift existing debt

• You can get up to three years or more interest-free

• You only make one monthly payment, reducing the risk of missing a due date

Drawbacks of consolidating debt with a credit card

The drawbacks of consolidating debt with a credit card 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

What is a balance transfer?

A balance transfer is when you move existing debt from one or more accounts onto a new credit card. This is the most common way to consolidate debt using a credit card.

Most people do this to take advantage of a 0% interest period, which means any payments you make go directly towards clearing the debt rather than paying interest.

How does a balance transfer work?

When you apply for a balance transfer card, you request to move a set amount of debt across from your existing accounts. The new card provider pays off those balances on your behalf, and you then owe that money to them instead.

You will usually be charged a one-off transfer fee, typically a percentage of the amount you move. After that, you have a set period, often between 12 and 36 months, to pay off the balance interest-free.

It is worth checking how long the 0% period lasts before you apply, as any remaining balance at the end of it will start to accrue interest at the card's standard rate.

How do I choose the best balance transfer card?

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.

How much does a balance transfer cost?

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.

This is typically between 3% and 5% of the amount you are looking to transfer. For example, transferring £1,000 with a 3% fee would cost you £30, while transferring £5,000 with a 4% fee would cost you £200. 

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.

Does your credit score affect a balance transfer?

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.

Does a balance transfer affect your credit score?

A balance transfer can affect your credit score in a number of ways, both positively and negatively.

When you apply for a new balance transfer card, the provider will carry out a hard credit check. This can temporarily lower your credit score by a few points, though the impact is usually short-lived.

Once the transfer is complete, consistently making your monthly payments on time will help build a positive credit history, which can improve your score over time. You may also see a benefit if the transfer lowers your overall credit utilisation ratio.

However, moving a large balance onto a single card can push that card's utilisation high, which may negatively affect your score until you pay it down. Opening a new account will also reduce the average age of your credit history, which can have a small impact.

Balance transfer credit card vs debt consolidation loan

Both balance transfer cards and debt consolidation loans can help you manage multiple debts in one place, but they work differently and suit different situations.