Crucial questions to ask yourself before consolidating your credit card debt

If you’re struggling with credit card debt, you are most certainly not alone. Coming into the new year, Britons owed £72.5bn on credit cards, equating to £2,688 worth of credit card debt per household.

For many, credit card balance is the number one priority when it comes to responsibly managing personal finances. Staying in control of your credit cards and properly managing debt has become an essential part of modern financial care.

For those with money owed across a number
of credit cards, consolidating that debt is a potentially smart move to make.
However, before you jump in, there are a number of key questions you need to
ask yourself.

Why debt
consolidation?

Consolidation allows you to take your debts
spread across a number of credit cards and transfer them into a single balance.
This allows you to better understand the extent of your debt, develop a
suitable approach to paying it off and removes the risk of you losing track of
what is owed when and where.

Consolidating debt means you have just one monthly payment to make, which should give you a clearer focus when it comes to eliminating your debt.

What
are my options?

There are two ways to consolidate your
credit card debt.

The first is to transfer your debt onto a
single, low APR credit card, commonly known as a balance transfer card. These
cards are designed to offer some relief from your current interest payments,
often offering a very low or free interest period for an extended amount of
time, within which you should aim to pay off the full amount.

The second option is to seek a debt consolidation loan. This involves using a lender to merge your debts into one loan which will lower your monthly payments. Consolidation loans come in two forms – secured, where the amount borrowed is secured against an asset like your home and unsecured, where the loan is not secured against any asset.

How do
I find the best balance transfer deals?

If you’re going down the balance transfer
route, you want to access the card with the lowest possible APR for the longest
possible period. Many providers offer 0% interest deals, but it’s important you
note how long this grace period is for (usually one to three years). Beyond
this, considerable interest can be charged.

You also need to acknowledge the cost of a
balance transfer. Your new provider will charge you a fee for moving the debt
over, typically a percentage (around 3%) of the amount you are transferring.

Your credit score will determine the
quality of balance transfer card you can access. A good credit score should
mean you can find a 0% card with a lengthy interest-free period, whilst a poor
score might mean a card with some level of interest from the very beginning.

What
are the risks?

Debt consolidation is a great idea, as long
as you can commit to paying off your debts in the right amount of time. If you
don’t, you risk getting into worse trouble than you were in before.

With balance transfer cards, it’s essential
you pay off your full amount inside the low or free interest period. Stray
outside of this and interest rates will accelerate heavily, which will only
exaggerate your troubles.

Similarly, not keeping up with loan
payments will lead to damaging charges. If the loan is secured against a
valuable asset, you risk losing it if you can’t keep up with your payments.

Thus, regardless of how you choose to
consolidate your debt, it’s essential you understand the parameters of your
agreement and stick to them, otherwise things can get nasty.

Are there
alternatives?

A final thing to consider is whether debt
consolidation is really the best route for you. Is consolidation a practical
move, or are you simply looking for an easy-fix solution that allows you to
ignore the problem for a little longer?

If possible, you should try and pay off your debts in a traditional manner before resorting to the consolidation route. There are a number of debt strategies you can adopt to help pay off your full amount without going down a consolidatory route.

There’s plenty to think about when finding
the best debt solution to suit you. Consolidating credit card debt is a very
smart move for some, but it’s imperative that you consider all the options
before making your move.

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