Trying to pay off several debts at once? Read this guide to find out how debt consolidation can simplify your repayments and help you take control of your finances.
As a result, debt consolidation can save you money on interest charges and also help you pay off your debt faster. Here, we look at how this process works, the different options you have for consolidating your debts and the pros and cons of debt consolidation to help you decide if it will work for you.
Virgin Credit Card Balance Transfer Offer
Enjoy a long term balance transfer offer of 0% for 18 months.
- $64 p.a. annual fee for the first year ($129 p.a. thereafter) annual fee
- 20.74% p.a. on purchases
- 0% p.a. for 18 months on balance transfers
- Cash Advance Rate of 20.99% p.a.
- Up to 44 days interest free
- Minimum Income Requirement of $35,000 p.a.
Repay your debt interest free with a balance transfer
Rates last updated October 24th, 2016.
- NAB Low Rate Credit Card
Balance transfer and purchase rate offers have been extended until 22 January 2017.
October 3rd, 2016
- NAB Low Fee Card
Balance transfer and purchase rate offers have been extended until 22 January 2017.
October 3rd, 2016
- Westpac Low Rate Card
Promotional BT period has been changed from 18 to 16 months and is valid until 30 January 2017.
October 12th, 2016
Debt consolidation with a personal loan
How does debt consolidation work?
When you apply for a debt consolidation loan or product, such as a credit card or personal loan, you include details of the existing debts that you would like to transfer to the new account. When the loan is approved, your lender will roll these debts into one on the new account by paying out the other lenders you’ve been dealing with.
You’ll then make regular repayments of the balance, with just one interest rate applied to the debt. If your previous debts were due at different times and had different repayment amounts and interest charges, then this process can make your monthly bills easier to handle and eliminate your debt faster.
Who should consider debt consolidation?
Debt consolidation can be a more affordable way to manage multiple card and loan balances, but it’s not right for everyone. In general, consolidating debts could work for you in any of the following scenarios:
- You have multiple debts on cards and loans.
- You struggle to make all your repayments.
- You’re paying varying rates of interest on your debts.
- You want to pay off all your debts.
- You want to start using just one credit card or loan for your expenses.
- You’re in a financial position to request a new credit card or loan.
If some or all of these factors apply to you, then you may want to start reviewing different debt consolidation and repayment options.
Types of debt consolidation
There are many ways to consolidate your debt, including balance transfer credit cards, personal loans and home equity. Below, we’ve outlined the key debt consolidation and repayment options available when you want to use this method to pay off your debts.
1. Credit card balance transfers
Balance transfer credit cards allow you to transfer existing debts to a new card and usually provide a low or 0% introductory interest rate. The introductory period could last anywhere from 3 to 24 months depending on the card and can allow you to save even more money on interest charges while you pay off the debt.
At the end of the introductory period, any balance remaining from your debt consolidation will revert to a higher, standard variable interest rate. It’s important to pay off all or most of the balance during this time so that you can avoid paying higher interest rates that could increase your debt. Other factors to consider with balance transfer credit cards include:
- The types of debts you can transfer. Most balance transfer credit cards will only allow you to consolidate debts from other credit cards that are issued by competitors, so they are usually best suited to people who have multiple card debts. But there are some companies – such as Citibank and Virgin Money – that also allow balance transfers from other loans.
- The amount of debt you can consolidate. Balance transfer credit cards usually allow you to use up to a certain amount of your approved credit limit for debt consolidation. This could be anywhere from 70% to 100% of the total credit available, depending on the card and your personal circumstances. If your debt exceeds this amount, then you may only be able to transfer some of it to the new card.
- Whether or not you’ll use the card for new purchases. Any new purchases made on a balance transfer credit card will attract interest charges at the purchase rate. This rate could be quite high compared to the introductory balance transfer rate. It also means that repayments will go towards paying off the debt from new purchases first, with any remaining amount going towards the debt you transferred.
Compare balance transfer credit cards
Ari’s debt consolidation processAri has three credit cards with balances worth $2,500, $3,000 and $3,500. He wants to start using just one card for all his payments and decides to get a balance transfer credit card to consolidate his current card debt of $9,000.
Ari compares cards and finds one that allows up to 90% of the approved credit limit to be used on balance transfers. It also offers 0% interest on balance transfers for the first 18 months. That means Ari’s credit limit for the new card must be at least $10,000 for him to successfully consolidate all of his card debt.
Ari decides to apply for the card and includes all the details of his existing credit card debts in his application. He is approved for a credit limit of $10,500 and his full balance transfer amount of $9,000. After he activates the card, his existing debts are transferred over to the new account. If Ari can make repayments of at least $500 a month, he will be able to clear his debt during the introductory period and avoid paying any interest.
2. Personal loans for debt consolidation
There are two main types of debt consolidation personal loans:
- Fixed rate loans. These debt consolidation personal loans give you a competitive fixed rate of interest for the term of the loan. They also have a fixed repayment amount, which can help with budgeting for your debt, but may charge extra fees if you want to pay off your loan early.
- Variable rate loans. These loans give you a competitive, variable rate of interest that may change over the term of the loan. While variable rate loans usually have a fixed repayment amount, many also have the benefit of no exit fees if you want to pay off your debt early.
Compared to credit cards, personal loans are more likely to allow you to consolidate debts from a variety of sources. They also tend to have lower standard variable interest rates than credit cards (not including introductory balance transfer rates). If you choose a secured personal loan, you may also be able to borrow a greater amount of money for debt consolidation, without the limits usually placed on credit cards.
Compare personal loans for debt consolidation
3. Home equity
If you have an existing home loan, this debt consolidation option allows you to draw money against the portion of your home that has been paid off (your “equity”). With home equity debt consolidation, you just need to apply for an extension on your existing mortgage and fill out a request to have your existing debts transferred over.
This type of debt consolidation appeals to a lot of people because home loans typically offer the lowest ongoing interest rates of any form of credit. But it will lead to higher monthly payments and could put your home on the line if you fail to make repayments.
Which debt consolidation option is right for me?
If you’re thinking about consolidating your debts, it’s important to find the right product for your circumstances and needs. As well as learning about the different credit cards, personal loans and home equity options available, you should ask yourself the following questions:
How much money do I owe?
Add up the balances for all your current debts so that you know the total amount you owe. This will help you compare debt consolidation options and get an idea of the repayment amount you may get if you roll them into one account.
How much can I afford to pay off my debt each month?
Most personal loans and home equity options for debt consolidation require fixed repayments. Balance transfer credit cards, on the other hand, have a monthly minimum payment amount of around 2% to 3% of the balance, and allow you to pay more than this whenever you want. Consider which of these options will offer the most convenience for you, while also aiming to pay off your debt in the shortest amount of time possible.
What types of debts do I have?
This factor could affect the type of debt consolidation products available. For example, if you wanted to consolidate your debts with a balance transfer credit card but had debt from a car loan, your options could be much more limited.
What is my credit score?
Most balance transfer credit cards and unsecured personal loans require good to excellent credit scores. This means you could have trouble applying for one of these options if you have black marks, such as late payments or defaults, on your credit file. Make sure you consider this before you apply for a loan, so that you can reduce the risk of declined applications that could further damage your credit score. If in doubt, you may want to speak to a lender directly to discuss your options.
Risks of debt consolidation
While there are a lot of potential benefits to consolidating debts and repayments, there are also some risks that need to be considered before you take any action. Common pitfalls include:
- Extending the time you’re paying off debt. If you choose a debt consolidation credit card or loan with a lower interest rate, there is a risk that you will end up paying off the debt for longer than necessary. Setting yourself a goal for paying off the debt and budgeting for repayments before you consolidate your debt can help you avoid this situation.
- High interest rates. If you use a balance transfer credit card to consolidate your debt and don’t pay it off before the end of the introductory period, you could end up paying an ongoing interest rate on the outstanding amount that could be as high as 22% p.a.
- Loss of assets. If you consolidate your debts with home equity or another form of security and then struggle to make repayments, you could risk losing your home or any other asset used to secure the loan.
- Pressure to claim bankruptcy. Depending on your circumstances, lenders and credit issuers may also pressure you into claiming bankrupt.
ptcy. This isn’t always the ideal solution and you may want to see if there are any other options out there.
Other options for repaying debt
If you’re juggling multiple debts, it’s important to consider all of your options before choosing one that’s right for you. Apart from debt consolidation, there are two other key strategies you can use:
- The “snowball” method.This option is when you pay off the smallest debt first so that you can clear the total on that account first. After that, you can focus on paying off the next-smallest debt, while continuing to meet minimum payment requirements for all your accounts. This strategy can help your overall credit history and gives you some breathing room by eliminating these bills.
- The “highest interest first” method. If you have multiple debts and choose not to consolidate them, another option is to continue to make minimum payments on all of them while aiming to pay off the one with the highest interest rate first.This method will lead to lower repayments across the life of your existing balances.
Since different types of repayment methods work in different ways to achieve the same goal, it’s important that you pick the option that is suited for your personal financial needs. You don’t want to pick an option that will end up hurting you in the long run. Examine all of your options before selecting a debt repayment method and remember to consult a professional if you get overwhelmed or confused.
If you’re paying off a lot of credit cards and loans, debt consolidation could help you manage your repayments more effectively and allow you to save money on interest charges. Now that you know more about this option and the different debt consolidation credit cards and loans available, you can make an informed decision about how you deal with debt based on your individual circumstances and needs.
Frequently asked questions
Can I consolidate debt onto a credit card I already use, or will I have to apply for a new one?
I am an average income earner with a mortgage of $600,000 and $10,000 in credit card debt. I have applied for several balance transfer credit cards and have been declined every time, even though I have never defaulted on any loans or credit cards. Do you have any other suggestions to help me pay off the credit cards?
The more credit enquiries you make, the worse it looks on your credit history. As a general rule of thumb, you should aim to make no more than 1 credit enquiry every 3-6 months.
Also, please remember to check the eligibility requirements for balance transfer credit cards before you. Most will say that you need a certain income to be eligible, and your salary may need to be higher to get approved for a limit of over $10,000. Our guide to paying back credit card debt may also be able to provide some options.
Can I use my superannuation to pay off my debts?
The lender will assess your financial situation when you submit your application. If you don’t currently have a source of income, it may be a sensible idea to wait till you’re employed before considering debt consolidation with a credit card.