Paying off debt can be hard at the best of times. Having to keep track of multiple debts – with varying payment plans and interest rates – can make it feel close to impossible.
This is where debt consolidation could make your life easier. This involves streamlining your finances by taking all your debts and putting them in one place to pay off. There are a number of ways you can do this. Here we look at the pros and cons of balance transfer cards and debt consolidation loans.
What is a balance transfer card?
If you’ve borrowed money across multiple accounts it can be difficult to manage your debt, but balance transfer cards can help simplify things. A balance transfer allows you to move all your credit card debt onto one card.
There may be a one-off fee for transferring the debt onto the new card. The fee is usually a percentage of the amount you are looking to transfer, so the bigger the balance the bigger the fee.
Balance transfer cards often offer 0% interest rates for a set period. This makes them an appealing option if you’re paying high interest on lots of different cards.
Always ensure the savings you make through low interest outweigh the cost of transferring the balance over to the new card and be aware of when the low interest rate period ends.
What are the pros of a balance transfer card?
- Credit cards offer flexibility over how much you pay back each month (always be sure to meet the minimum payments, though)
- 0% or low interest rates could be available to you
- Balance transfers promotions periods and fees usually only apply for transfers made in the first 60 days after opening an account
- If you don’t meet the terms and conditions, you might lose introductory low interest rates
- The amount you can borrow will likely be less than with a loan
- Applying for a credit card may hurt your credit score in the short-term, but could improve it if you keep up with repayments
- You will need to pay a transfer fee which will be a percentage of the money you’re moving over to the new card
- After any introductory low interest rates, your APR will likely spike considerably
- If you close the accounts for the cards you are transferring debt from, this could affect your Experian Credit Score. This is because, if you’re cancelling cards you’ve had for a while, the average age of your accounts will decrease. Also, it could change your credit limit utilisation. Both of these things can impact your score.
What is a debt consolidation loan?
A debt consolidation loan is another way you could make your debt more manageable. With this approach, you take out a loan to pay off your current debts, and then pay back everything you owe to one lender. (The loan will more likely be called a personal loan or secured loan by the lender, depending on what they are willing to offer you.)
You will agree the amount with the finance company providing the loan and set a timescale over which you will pay the money back, plus interest.
There may be an initial fee to pay before you receive the loan, which is normally a percentage of the total amount you’re borrowing.
What are the pros of a debt consolidation loan?
- You will probably be able to borrow more than with a balance transfer card
- A fixed repayment schedule allows you to plan ahead
- A loan can be used to cover lots of different types of debt, not just credit card debt
- Loans are more likely to come with a fixed interest rate
- You could face extra charges if you want to pay back the loan early
- There may be an initial fee before you receive your loan
- Although you may get a lower interest rate, the total cost may be higher depending on the length of the repayment period
- Applying for a loan may hurt your credit score in the short-term, but could improve it if you keep up with repayments
- If you have a low credit score you may have to take a secured loan which could lead to you having an asset possessed by the lender if you fail to make payments
Your credit score
To increase the likeliness of being offered better rates on a balance transfer card or loan, make sure your Experian Credit Score is in good shape.