Tips to Consolidate Debt

Consolidating debt, means that you bring together different loans and debts and place them in one or two specific accounts. This makes it easier to manage. Also consolidating debt often enables a lower interest rate to be gained.

What is the best way to go about consolidating debt?

 1. Work out Where your Debts are.

The first thing is to write a list of all your various debts. This includes, mortgages, secured loans, unsecured bank loans, credit card debts, store card debts. private debts, outstanding payments.

Next to each debt write down the amount of debt, the interest rate, the time period and the monthly repayment.

You may get something like this

• Mortgage £100,000 - 6% - £600 per month for 30 years
• Credit card £10,000 - 16% £200 per month (minimum) until you pay it off
• Bank loan £5,000 - 8% £300 per month for 2 years
• Store Card £500 - 25% £70 per month until you pay it off.

2. Use Savings

The next thing to do is to work out if you have any savings you can use to pay off your debt. Of course, it is good to have savings and a  ‘nest egg’ but there is no point in gaining interest of 4% a year, when you are paying interest at 24%

3. Pay off Credit Cards First 

In the above example, the clear priority is to pay off the credit card and store card debt. It is tempting to just pay the minimum, but, by doing this you will never actually pay off the debt. - You will just be meeting interest payments. This means your payments are effectively wasted. You pay money but get no reduction in debt. This is why it makes sense to try and consolidate debt in a lower interest paying account.

4.  Remortgage

One possibility for the above example is to consolidate the credit card debt into the mortgage. If the bank allows it you can remortgage for £110,000 and use the £10,000 to pay off your credit card debt. This will leave you with more monthly disposable income. You could then use this extra money to try and pay off your mortgage early. It is becoming more difficult to remortgage (because of falling house prices) but, if you can consolidate debts into a mortgage it is a good idea. Note a mortgage is repaid over 30 years so the total cost may be higher. However, if you use the savings to make extra lump sum payments you can definitely make sure you end up better off.

5. Debt Settlement

This is an extreme form of debt consolidation, and may be appropriate for someone with £20,000 of credit card debt. A debt settlement company will help to negotiate a reduction in your total debts and also give you just one repayment per month. Your credit record will say ’settled in full’ - which is different to ‘paid in full’. It is not without its drawbacks but, can be a potential last ditch solution. However, in the UK, there are certain circumstances where bankruptcy is preferable to debt settlement. Speak to an independent adviser before taking out such a deal

6. Make an Effort to Change Your Spending

Debt consolidation can help, but, it does not resolve the fundamental issue - which is divergencies between income and  spending. When you consolidate debt, take the opportunity to try and deal with the underlying issues behind your personal debt. Debt Consolidation can only help so much. Don’t expect it to solve all your problems