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Published July 7, 2023
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Why Consolidate Credit Card Debt?

When you consolidate credit card debt, you combine all your existing credit card debt into one monthly payment with a lower interest rate.

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Consolidating your credit card debt into one loan can be highly beneficial for managing your debts and overall financial well-being, provided you go about it properly. 

What is credit card debt consolidation?

Debt consolidation is a process that combines all your loans into a single loan with just one interest rate. Effectively, when you consolidate credit card debt, you are taking all your existing credit card debts and putting them into one lump sum in a single account, which you can then pay off monthly.

As part of the consolidation process, also sometimes called credit card refinancing, your new lender will pay off all your existing loans for you, so you have only one source of ongoing credit card debt.

Like using a balance transfer to pay off your credit card debt, the success of your debt consolidation will rely to a large extent on your ability to stick to a strict repayment plan without using the new card for impulse spending. In other words, it will only work if you stop paying for things you cannot afford. 

Reasons to consolidate credit card debt

The benefits of debt consolidation are fairly straightforward and may seem like a no-brainer for those with several debts to different lenders with different rates and times of the month when minimum repayments are due.

Consolidation should, first and foremost, save you money by moving all your existing debts to a lower interest, at least for the introductory period of up to 18 months with your new lender. That promotion is a big help, especially if you’re paying outrageous credit card interest rates of 20% or higher on one or more of your existing cards. But, like balance transfer credit cards, you’ll need to be vigilant regarding when that period ends, and your new rate comes into force. 

Another huge plus is that you’ll have a single debt, with one manageable repayment due each month, which should be much lower than the combined amount due over several cards. Paying off multiple loans on top of rent, electricity and everything else can be overwhelming, so consolidation will seem like a godsend. (Strapped for cash? Consider ways to save money on a tight budget.)

Finally, if you’ve had several cards for some time, it’s fair to assume that you would have attracted late fees, which would have been detrimental to your credit rating. Consolidating your credit card loans under one umbrella will be a big help here, too, because it allows you to get your rating back on track by staying up to date with the payments on a single card and hopefully paying that debt off as quickly as possible.  

It’s also worth noting that a less-than-stellar credit rating will not preclude you from getting a debt consolidation loan, either in the form of a personal loan or a credit card. Still, you may not get the best possible conditions, especially with regard to the interest rate. Any loan that helps you consolidate should, however, be at a lower rate than most, if not all, of the ones you are currently paying. 

What to consider before consolidating credit card debt

Consolidation is a solid strategy for getting out of credit card debt as soon as possible, just as long as you follow some well-acknowledged basic guidelines and don’t fall into any traps. 

Before you decide to consolidate credit card debt, there are a few questions you should ask yourself.

Is debt consolidation my best option?

Before agreeing to a loan with a new lender, make sure you’ve looked into your alternatives. 

Can you refinance debt with your credit card company? If most of your debt comes from a single credit card, see if you can make a repayment plan with the credit card company that issued the card instead of taking on a new loan. Most major lenders in Australia are willing to work with those struggling to repay loans and credit cards

Seek out professional financial advice by contacting the National Debt Helpline or the financial charity Way Forward. These organisations can assist in speaking with creditors, devising a comprehensive debt solution plan, identifying support options you may be eligible for, and locating a financial counsellor

Do I trust the lender?

There’s no shortage of lenders out there angling for your business, so take some time to shop around. Long gone are the days when only the big four banks offered such products. You can always look for a product with better rates or a more reasonable number and frequency of fees and charges. 

Be careful to check a potential lender’s legitimacy to ensure they are above board. Look for reviews online and check the ASIC company registry if you’re unsure. 

Once you’ve found what you think is a good deal, you can ask your bank if they’ll match it or even better it — it never hurts to ask, and you’ve got nothing to lose.  

Will I include all of my existing debt?

You should include all your credit card debt in your consolidation application, even if you have a dozen cards and may feel embarrassed about that. There’s little point in consolidating only some debt and leaving you with those outstanding bills to pay monthly. 

Will I close my old accounts?

Some debt consolidations allow you to keep your current cards, whereas others pay out your loans and force you to close those accounts. However, you should close old accounts and cancel your credit cards if you are serious about getting on top of your debt. Otherwise, you could end up dipping back into those funds and running your debt up again, placing you right back where you started or even worse off.

Do I understand my new repayments? 

Knowing how much your consolidated debt will be allows you to budget accordingly. If, for example, your new consolidated debt amounts to $15,000 and you have an interest-free period of 18 months, you’d want to pay off the loan before the new interest rate kicks in, which works out at just over $830 a month. Once you have that figure in mind, you can make a plan to achieve your financial goals

Am I really going to be paying less? 

Watch out for lenders who charge fees that will outweigh the benefits of debt consolidation — especially lenders that charge a fee for every loan they pay out on your behalf. Fortunately, this will rarely happen in a credit card consolidation scenario. 

Am I changing the type of loan for the worse? 

Finally, be wary of moving from an unsecured loan to a secured loan, especially if you doubt your ability to repay the new consolidated loan. If, for example, you put up your home or car as collateral, you could lose one of them in a worst-case loan default scenario. 

» MORE: Common types of personal loans in Australia

Frequently asked questions

Does credit card debt consolidation hurt your credit?

Once you apply for a debt consolidation loan or a balance transfer credit card, your credit rating may temporarily drop after a lender or card issuer makes a hard enquiry to check your credit report. But if you pay on time and stay out of debt in the future, the overall effect could be positive.


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