Is it a good idea to consolidate your debts?

For many of us, January's payday just can't come soon enough. If you overspent at Christmas, or borrowed more than you can afford, you might be thinking that you just can't afford to pay all your bills this month. But are there certain bills you should never miss?
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Debt consolidation just means taking out one new loan and using it to pay off all your existing smaller debts. So instead of having multiple repayments to make each month to your credit cards, loans, store cards and so on, you just make a single payment a month. Having just that one repayment can mean it’s easier to budget and keep track of your finances in general.

If you consolidate your debts you’ll still owe the same amount of money – so it isn’t a way of getting out of debt. But it can help make your debts more manageable – and not just because you only have the one repayment to make each month. For example, you may be able to spread your repayments over a longer period, which could mean your monthly payments are lower. But remember that although you might be better off month-to-month, you may well end up paying more overall.

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If you do decide to consolidate your debts, you need to make sure that you can realistically afford the new payments. If you misjudge your budget, you could find yourself struggling with one big debt rather than lots of little ones. Try to avoid the temptation to get a bigger debt consolidation loan than you need too.

There are some credit cards specifically designed for debt consolidation. Some offer up to three years interest free, providing that you make at least the minimum repayment each month – if you don’t pay anything, you could start being charged interest. Ideally, you should aim to clear the whole balance by the end of the offer period. You can use a Balance Transfer card to clear other credit card debt, but a Money Transfer card will also allow you to repay other borrowing, including loans and overdrafts.

The best credit card offers are usually reserved for those with good credit scores, so if you’ve already started to struggle with your repayments you may not be accepted for these cards. Bear in mind too that you may be charged a fee when you transfer your balances onto your new card.

You can also consolidate debt with an unsecured personal loan. Whilst loan rates start at less than 5% APR, you’ll need a squeaky clean credit history for these. Comparison sites like MoneySuperMarket can help you find a loan that you will be accepted for.

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If you are a homeowner, and you have plenty of equity in your property, you may be able to remortgage or get a secured loan and use that to consolidate your other borrowing. You should think carefully before you do this – because the loan is secured on your property your home is at risk if you are unable to make the repayments.

Debt Advisory Centre: 0161 871 4881