How to consolidate your credit card debt

Do you have a couple of credit cards which plague you with constant reminders of outstanding debt? Trying to manage your debt when it’s coming from every angle can be difficult, not to mention costly.

Less can be more when it comes to credit cards. Spreading your debt across different credit cards may make it harder for you to manage, and you may be accruing more interest rate charges.

If you are feeling stuck between a rock and a hard place and want to break your credit card debt, there are a couple of options you can consider. But it pays to do your research, particularly if you have bad credit.

What is debt consolidation and why should I do it?

Credit card debt consolidation is when you combine your multiple existing credit card debts into one, to better manage your repayments and minimise the amount of fees and interest you’re paying.

However, you should ensure the consolidated debt’s interest rates and/or fees are not higher than what you were paying on your previous debts.

How do I consolidate my credit card debt?

There are three main options you could consider when you need to consolidate your credit card debt:

1. Balance transfer credit card: Involves moving your debt(s) onto a new credit card with (ideally) a lower or no interest rate for a set period of time. This gives you some much needed breathing room to get back on your feet and pay down your debt.
2. Debt consolidation personal loan: Involves moving your debt(s) onto a personal loan with (ideally) a lower interest rate than credit cards, and a fixed term so you’ll be encouraged to pay off the debt through minimum repayments. If you have multiple credit card debts, this can help to simplify your repayments.
3. Refinancing your home loan for debt consolidation: Involves switching your existing home loan for another mortgage, and using your equity to borrow more money to pay off your other outstanding debts, including credit card debts. While this can often have one of the lowest interest rates, the longer loan term means you may still end up paying much more interest on what you owe over the long run.

Which credit cards can consolidate debt?

Balance transfer credit cards are designed to help you consolidate your credit card debt. Some lenders will also allow you to include debt from personal loans, however the overall debt cannot exceed the credit limit on your new card.

Balance transfer credit cards help by letting you transfer your debt to a credit card that charges a lower interest rate and lower fees. They can also offer a honeymoon period with no interest or a reduced rate, providing much needed breathing room to begin to pay back your debt without it growing too fast.

One way to avoid growing more debt is to put your balance transfer credit card in a drawer (or the freezer!) the moment you get it, and budget effectively to start paying the debt off. Making any new charges on top of your existing debt will see you hit with interest on that new purchase straight away.

Also, keep an eye on the length of the honeymoon period and post-honeymoon interest rates, as the balance transfer credit card may revert to a higher interest rate than your previous one when this introductory period expires. Similarly, the balance transfer card may have higher fees and charges after this honeymoon period.

Pros

• Honeymoon rates
• Lower interest rates
• Less fees

Cons

• If misused, you’ll grow debt
• Post-honeymoon interest rates could be higher
• Post-honeymoon fees could be higher

Who offers debt consolidation credit cards in Australia?

There are a wide range of Australian lenders, including major banks, credit unions and mutual banks, who provide balance transfer credit cards to help consolidate credit card debt.

One of the best ways to find a balance transfer credit card that suits your financial situation is to use a comparison table or balance transfer calculator. This lets you filter through a range of search options based on their interest rates, features and fees, and find options that may better suit your specific financial needs.

How do I get a debt consolidation credit card?

1. Use RateCity to compare some of the most competitive balance transfer credit cards for your financial needs.
2. Use RateCity’s balance transfer calculator to check which product that may save you the most money and/or help you pay off your debt in the most suitable time frame.
3. You’ll need to complete the standard application process for your new credit card. Ensure you check your eligibility before applying, and try to present yourself as an ideal borrower, particularly if you have bad credit.
4. Provide your new credit card company with the details of your original account(s), so the balance can be transferred.
5. Consider cancelling your old credit card. This can prevent you from being charged additional fees, and helps you quell the temptation to use it and increase your debt.

Can I use a credit card to consolidate debt if I have bad credit?

Your approval for a balance transfer card will depend on your credit history and reliability as a borrower. If you want to use a balance transfer credit card to consolidate debt, but aren’t sure that your credit rating will get your application approved, you may need to work on improving your credit score. This doesn’t mean you won’t be approved by any balance transfer credit card provider, but you may want to move the odds in your favour first before applying.

This may be frustrating, but it’s for your benefit, as every time you apply for a credit card the provider will perform a ‘hard’ inquiry on your credit report. While one credit card rejection shouldn’t hurt your credit score, repeated credit applications over a short time could make you look “credit hungry”, and potentially make things worse.

What should I be wary of when consolidating debt?

Consolidating your debt isn’t always an easy fix. While it’s often a smarter way to manage your debt and could help you pay off your debt sooner, you do have to be aware of the fine print.

Things to look out for:

• Check that your new interest rate is lower than what you are currently paying, otherwise you may end up finding yourself in more debt.
• Don’t forget to take the fees and charges into consideration.
• If you have arranged a balance transfer that has a low rate, or no rate, introductory period, make sure you check what the interest rate is after this period ends, and try to commit to paying off your debt during the intro period.
• If you are considering a credit card provider that is not well-known, check they are licenced by ASIC.
• Be cautious when companies offer ‘credit fix’, ‘credit repair’ or ‘debt solution’ and charge a fee on the assertion they will improve your credit rating. Credit card defaults marked against your name can only be removed if you prove they are incorrect – you may be able to do this yourself by contacting the credit bureau and the parties involved.

Need some help?

If you’re feeling overwhelmed and want some help managing your debt, it might be worth talking to a financial counsellor. This is a free service offered by community organisations, community legal centres and some government agencies to help you solve your money problems. For more information, please ASIC’s MoneySmart.

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