The best ways to consolidate credit card debt

If you owe money to multiple lenders or credit card providers, debt consolidation is a way of paying off all those loans together and turning them into one monthly payment.

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Done properly, a debt consolidation loan can have two big advantages:

1. Because you’re turning multiple forms of credit into one single loan, you only have one monthly payment to manage
2. If the interest rate on the debt consolidation loan is less than the interest you’re paying on your existing debts, you’ll usually save money too

That’s a quick summary, but if you want more information on debt consolidation loans in general, we’ve also written a full guide to help you find out whether a debt consolidation loan is right for you.

In this article, we’ll focus on how you can consolidate credit card debt specifically, answering some of the most important questions and giving you tips on how you can save money in the process.

Why would I consolidate credit card debt?

Credit card debt is a unique form of revolving debt. Unlike personal loans, where you make fixed repayments and pay it off in full over a specified period, credit card debt has no term.

That means that it is one of the few types of debt which you can keep rolling over. This can be tempting, but also carries higher costs.

In general, if you pay a credit card off in full each month, you aren’t charged interest, but if you only pay off a small portion of the credit card balance, you’ll be charged interest on any monies outstanding – often at a high rate.

The same also applies to store cards, so if you have multiple credit cards, there’s a good chance you’ll be paying a high rate of interest on any borrowing you allow to roll over.

As a result, you may be able to save money by paying off credit or store card balances with a new loan, and potentially lowering your monthly repayments in the process and the rate of interest.

How do I consolidate credit card debt?

Credit card debt consolidation is straightforward:

1. You work out how much you have outstanding across all your credit cards (you may have this information to hand; if not, contact your card providers)
2. Use this overall figure as your loan amount, and look for a loan with an appropriate interest rate and term (the length of time over which you’ll make repayments)
3. After you’ve chosen the best loan option and been approved, the loan will be paid to you – you then use this money to pay off your selected creditors
4. You make a single, regular monthly payment on your new loan, paying it off over the agreed term

Ideally, a debt consolidation loan will have a lower interest rate than your credit card debt(s). However, If you have a poor credit score, you might find that you have fewer options available to you

What is the best way to consolidate debt?

There are two popular tools used for unsecured debt consolidation:

1. A personal loan
2. A balance transfer credit card

The best option for you will depend on your personal circumstances, but here’s an overview of each option.

Using a personal loan to consolidate debt

Using this option, you take out a personal loan, which you use to pay off all your credit or store card debts. A personal loan is repaid over a fixed term – for example, you borrow £1,000 and pay it back over three years – at an agreed interest rate.

Ideally, the personal loan repayments will be at a lower interest rate than your credit card repayments, meaning that you will usually save money in the long term. In any case, a single monthly payment is easier to manage.

Unsecured loans like these could come from a bank, an independent lender or even a credit union.

Taking out a loan to pay off credit card debt can help you to make significant savings on your total repayments, and make life simpler, too. Our guide on taking out a loan to pay off credit card debt weighs up the pros and cons, with tips on how to make debt consolidation loans work for you.

Related post: If you’re  wondering whether to use a credit card or a personal loan, check out our detailed, simple to use guide on personal loans vs credit cards,  explaining the pros and cons for both, with information on how to get the best out of each one.

Using a balance transfer card

A balance transfer credit card is a way to move one or more credit card debts onto a cheaper card. Balance transfer credit cards usually have a low rate or an interest free period for an introductory term, which makes them attractive, but this generally rises. There is generally a balance transfer fee to be paid too.

Paying debt off quickly

Speaking of smart ways to pay off debt, a note on the benefits of paying it off quickly: the quicker you pay off debt, the less total interest you will pay.

Here’s why: imagine you borrow £1,000 at 10% with a loan term of 2 years. You’ll repay the original £1,000, plus £200 in interest payments.

Now imagine you borrow the same £1,000, but instead you borrow at 5% for 5 years. You’ll repay £250 in interest, more than if you’d borrowed at a higher rate.

This is a simplified example, for illustration purposes only, but it shows that you should pay off debt as quickly as you are able to, to minimise the total amount of interest you have to pay.

Many lenders give you a lot of flexibility when setting your repayment terms. A loan calculator will show you exactly how much you’ll need to repay (based on a representative APR), and it’s worth using budgeting tools to see how this will affect your monthly income and expenditure.

You should always keep in mind that it’s essential to stay on top of monthly payments in order to maintain a good credit score and never borrow more than you can afford.

Is consolidating credit card debt bad for your credit score?

It might have a small initial impact, but in the long term it’s likely to be good for your credit score. A quick recap on how your credit score – also known as a credit rating – is calculated:

1. Credit bureaus such as Experian collect data on you
2. They compile that data and sell it on to third parties

A good or bad credit score is just one factor that lenders consider when deciding whether to offer a loan. In some cases – such as lenders that use Open Banking – your credit score might not even be viewed.

In any case, the biggest factor in your credit score is whether you have a track record of repaying debt on time.

Late – or missed – payments to lenders reduce your score. However, a well-planned and well-managed debt consolidation loan means that you’re less likely to miss payments on your existing debt – for that reason, it’s actually likely to be good for your credit score over the long term.

Your score might take a short term dip if you make several loan applications or increase your credit utilisation ratio (how much of your total available borrowing you’re using), but over the long term this should be outweighed by making consistent payments on your debt consolidation loan.

Can I negotiate credit card debt myself?

As we’ve explained above, negotiating credit card debt is something to consider only when you’re in danger of missing payments. If that’s the case, you’ll want to get free, independent advice (Step Change is another good place to start) and you need to be aware that it may harm your ability to access credit in the future.

You can negotiate a temporary reduction in credit card payments (if for example your employment has paused because of coronavirus) or something longer term if required.

It may also be worth considering credit counseling if debt is becoming a problem.

Next steps

If you think a debt consolidation loan could be right for you, you’ll want to start by working out exactly how much you can owe, and looking at loan options for that amount.

If there’s anything we haven’t answered above, feel free to leave a question in the comments section below!

Now that you’ve read our article on debt consolidation loans, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.

Frequently asked questions about how to consolidate credit card debt

Is consolidating credit cards bad for your credit?

No – done responsibly, consolidating credit card debt should be helpful for your credit score in the long term. You might find that any form of lending causes your score to dip in the short term though: you can find a full explanation here.

How much credit card debt can I consolidate?

This will depend on your credit score, but for some borrowers it may be possible to consolidate tens of thousands of pounds worth of credit card debt. For others, that figure is smaller, but should still be in the low thousands in most cases.

What is the fastest way to pay off credit card debt?

There is no fixed limit to how quickly you can pay off credit card debt. So the fastest way to pay it off is simply to maximise the repayments you make and to avoid increasing the debt by making further payments on credit.

How does a debt consolidation loan affect your credit score?

Done responsibly, a debt consolidation loan is a great way to sustainably increase your credit score – that’s because it should help you to pay off your credit card debts, building up a track record of successfully managing credit. It should also help you to save money: we’ve put a full explanation up here.