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.