Debt consolidation

In broad terms, debt consolidation means combining all your unpaid debts into one loan in order to pay them off at a lower interest rate and gain greater control of your finances.

If you are struggling to balance your debt repayments, consolidating them all into one can be an efficient way of solving the problem. It can also help reduce the stress of increased interest rates, as you can normally get a lower overall interest rate during the introductory offer.

While there are many benefits to debt consolidation, it can be a risky proposition if you don’t take appropriate precautions.

How can I consolidate my debt?

You can consolidate your debt and reduce your repayments by doing one of the following:

  • Getting a balance transfer card. A balance transfer card is a new credit card with a lower interest rate fixed for a period of time, known as ‘an introductory offer’. These cards can help you reduce the amount of interest you owe, which can help you pay down debt. However, paying those off during the introductory period could be difficult if you don’t make maximum repayments. Also, the revert rate, or the interest charged on any leftover balance, is usually higher following the fixed period. Therefore, you should exercise this option if you’re able to pay off your debt within this period – otherwise you could end up in debt again.
  • Taking out a personal loan. A single personal loan could be an efficient means of paying off the money you may owe, such as your credit card debt and outstanding interest. On the upside, you only need to make repayments once every week, which can help you reduce your overall debt. Watch out for longer-term personal loans though, as you’ll end up paying more in interest and fees on those – even if it’s a cost you can budget for.
  • Refinancing your home loan. If you have a home loan, you could consider refinancing your loan in order to pay off your debts. While it’s a simple enough solution, you’ll need to consider ongoing mortgage costs, administration costs, establishment fees and loan service etc. Ask your lender about this option. You can also utilise the redraw facility in your home loan if you have one.

Can I consolidate my debt if I have bad credit history?

Yes – although it can be a prolonged process. Not only will you need to create a plan to pay off your outstanding debts, you’ll also need to ensure you:

  • Correct any credit file errors. If you feel there’s an erroneous listing in your credit report, alert the credit reporting agency straight away. If you don’t reach an agreement with the agency, you can escalate the matter with the ombudsman.
  • Can afford the repayments. Discuss payment terms that work for you with your creditor.
  • Pay on time. Repayments done in a timely fashion will usually work in your favour, as creditors record on-time payments straight away.

Things to avoid

  • Getting into more debt. If your consolidation loan increases your overall debt, this means you are making it worse for yourself. As an example, after you’ve transferred your credit card balances to your home loan, you might still add to your credit card debt. If you choose to turn your credit card debts into a secured debt – where you would use an asset such as your home as security – you could end up losing your home if you fail to pay the new loan.
  • Refinancing traps. Debt brokers are not always your friends. If you are thinking of refinancing, go through an established bank. Also, remember that you can get free financial counselling. Hastily signing on a loan with excessively high fees could aggravate your financial predicament.
  • Not paying the new loan. If you miss a payment, your creditor will typically give you a call and/or send you a letter. Most time you’ll be able to avoid further trouble if you make the payment straight away. However, if you miss your payment by more than two weeks, an appropriate notice could be recorded in your credit file, which might affect your credit score.