What’s the smartest way to consolidate debt?

The smart way to consolidate debt

Here's what you need to know.

Consolidating Debt

If you currently have credit card debt, you're not alone; data shows that £1,685 billion is owed by individuals in the UK. If you're struggling with multiple credit or store card repayments, the smartest strategy to pay them off is through credit card consolidation. 

When you consolidate credit card debt, you combine your existing credit card debt into a single loan with a lower interest rate. A single lower interest rate will allow you to save money each month and pay off debt faster.

Many factors guide your decision to consolidate credit card debt, including:

  • the amount of credit card debt you owe,
  • the interest rate,
  • your credit score,
  • Whether you have equity in your home.

The most popular reason for credit card consolidation is to pay off debt.

3 Ways To Consolidate Credit Card Debt

Here are 3 ways you can consolidate credit card debt:

  1. Consolidate debt with a personal loan,
  2. Use a 0% APR credit card,
  3. Tap into your home's equity.

Let's explore each option.

  1. Consolidating debt with an unsecured or personal loan

  • A personal loan is an unsecured loan with a fixed monthly rate that could help you pay off a credit card.
  • The goal is to get a lower interest rate than you're currently paying on your credit cards.
  • With a fixed interest rate, your monthly payment never changes. In comparison, credit cards have variable interest rates, which can change over time.
  • Your credit score may increase because a personal loan is considered an instalment loan.
  • Personal loans may have a one-time origination fee, which is included in the loan's APR. 

The downside of an unsecured loan is that to qualify you typically need a good to excellent credit score. There may also be a cap on how much you're able to borrow.

2 Using a 0% APR Credit Card

  • A 0% APR credit card is a helpful tool to consolidate high-interest credit card debt.
  • With the right card, you may be able to transfer your credit card balance to a new 0% APR credit card.
  • As its name suggests, a 0% APR credit means you don't accrue any new interest on your credit card balance for a pre-determined period. 

One of the downsides of a 0% APR credit card is that the 0% offer usually only lasts for a set time such as 12-18 months. If you're not able to pay back the loan in that time, you could end up paying even higher interest rates. Some 0% APR credit cards charge a small fee for a balance transfer. 

The best offers are usually only available to those who have a good to excellent credit score.

3 Tapping into your home's equity

  • A third option is to tap the equity in your home, and then use the proceeds to pay off high-interest credit card debt.
  • Typically, the interest rate on a home equity loan is lower than the interest rate on your credit card debt.
  • To use this strategy, you must own a home and have sufficient equity in your home.
  • You can use a home equity loan or a home equity line of credit.

If you own a home and have more than £20,000 of debt, a secured loan could be a good way of getting lower rates and being able to manage debt. Unlike a personal loan, you're more likely to get a secured loan if you have a poor credit score.

The downside of a secured loan is that the debt is secured against your home, so it's important to think carefully before considering a secured loan as you could lose your home if you default on your loan.