Credit card debt consolidation

What is credit card debt consolidation?

Debt consolidation means combining multiple debts into a single debt. This makes it easier to pay off because you only have to make one repayment.

Consolidation also reduces the fees you're charged with multiple credit cards, and if the new debt has a lower interest rate it's cheaper to pay it off too.

In Australia there are specific credit card offers for debt consolidation called balance transfer credit cards.

But it's not your only option.

Option 1: consolidate your credit cards with a balance transfer

A balance transfer simply means moving one credit card balance onto a new credit card. But you can also consolidate multiple card balances onto a single new credit card.

The balance transfer offer typically gives new customers a special 0% rate to help them pay off the outstanding debt. Right now, the best balance transfer credit card offers give you 0% interest for around 24 months.

How to consolidate your credit cards with a balance transfer

1. Do the maths. Work out how much you're paying each month on your current credit cards. And total up your entire outstanding balance.
2. Find a new balance transfer credit card. Look for a card that gives you 0% on your balance, for as many months as possible. But look at other costs like the card's annual fee and the balance transfer fee (this is usually 1–3% of your balance).
3. Apply for the new balance transfer card. The card company needs to see your income and expenses, and check your credit score.
4. Consolidate the debts. Once the card is approved, your new credit card company will tell you how to transfer the funds to pay off your outstanding car balances (sometimes they'll do it for you automatically).
5. Close the old cards. Close out the old cards so there's no temptation to spend more on them. This could start the cycle all over again.
6. Repay the balance. Focus on paying off your new card each month.

Option 2: consolidate your credit cards with a personal loan

Instead of getting a new credit card, you could take out a personal loan and use the funds to pay off your credit cards. Then you just have to repay the personal loan.

Unlike a balance transfer, you won't get a 0% interest period with a personal loan. So it's probably the more expensive option.

How to consolidate your credit cards with a personal loan

1. Do the maths. Work out how much you're paying each month on your current credit cards. And total up your entire outstanding balance.
2. Compare personal loans. Look for a personal loan with a low interest rate and low fees. Choose your loan term as well (terms range from 1 year to 7 with most personal loans).
3. Apply for the loan. Personal loan approval is usually pretty quick. The lender will check your credit score and evidence of your income and spending.
4. Pay off the credit cards. Once the loan funds hit your bank account transfer the money to pay off your credit cards. Then close out those credit cards.

Personal loan or balance transfer: Which choice is right for you?

• A balance transfer card will usually be cheaper. With a good balance transfer card you can avoid interest charges completely. This makes the balance transfer option cheaper for most people. While you can find a personal loan with a low interest rate compared to most credit cards, there are no 0% options. Interest charges will cost you.
• Both options come with fees. You can't avoid the balance transfer fee or the card's annual fee. With a $3,000 card balance, a 3% fee would be $90. But many personal loans charge an annual fee of several hundred dollars, or a small monthly fee.
• Flexibility. With a balance transfer you basically get 2 years to repay your debt at most. Personal loans for debt consolidation are more flexible. You can take out loans for up to 7 years. But taking years to pay off credit card debts via a personal loan can cost you a lot in interest.
• Credit cards require more discipline. Credit card companies are happy if you just keep making the minimum monthly payment, dragging your debt out for years if you're not disciplined. And if you use the new credit card to keep spending you might end up back in debt. Personal loans have a fixed end date.

Personal loan versus balance transfer: debt consolidation costs breakdown

Here's what it would cost to consolidate multiple credit cards debts totally $5,000 over 2 years.

We've assumed you repay the balance in full.

In the example above the balance transfer option works out to be significantly cheaper if you repay it during the 0% interest period.

Alternatives to debt consolidation

Pay your credit card debts off

You don't have to consolidate multiple credit card debts. As long as you make the minimum monthly payments on each card, you can choose to focus on one card first and make extra payments there.

You could:

• Focus on the smallest card first. Paying off at least one card balance fast is just a good feeling and helps you get back in control. Starting with the smallest debt is an easy goal. Baby steps.
• Focus on the highest interest card first. This is probably the smarter decision, mathematically. It's generally wise to pay off the highest interest debt first because it will grow faster if you ignore it.

Reviewing your spending is always a good idea

When you're drowning in debt it's really hard to take a step back and re-examine your finances and spending habits. And if you're living paycheck to paycheck you don't need anyone to tell you to simply "spend less".

But for many people, reviewing your spending habits and drawing up a budget will help you find some savings.

Any extra money you manage to save can go straight to repaying your credit cards.

Hardship assistance and other forms of help

If you're really struggling with multiple credit card debts, getting a new credit card or personal loan probably won't help. If you're missing repayments, or you're about to, you could talk to your credit card company first.

Finance providers offer hardship assistance schemes to customers who qualify. Your card provider might offer:

• Financial counselling and budgeting help.
• A temporary pause or decrease in your minimum card payments.
• A temporary waiver on late payment fees.

To speak to a qualified financial counsellor about your money problems you can also call the National Debt Helpline on 1800 007 007.

Written by

Richard Whitten

Senior Money Editor

Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise

Richard has written 687 Finder guides across topics including:

• Home loans
• Credit cards
• Personal finance
• Money-saving tips