Consolidating Your Credit Cards

It is easy to end up with a wallet full of credit cards, but it can be more difficult to get rid of them.

Australian banks and other financial institutions were happy to throw around credit cards during the last decade, and many people are still living with the burden of multiple cards, many of which may be close to their limits.

In order to take control of your credit cards, one of the first things you can do is consolidate your various credit cards and store cards.

When consolidating your cards you have a few options.  You can roll them all into a single credit card, you can consolidate them into a new personal loan, or if you have a home loan you may be able to roll the cards into your mortgage.

In this guide we will take a look at the main options for consolidating your credit cards, along with the pros and cons of each option.

Consolidating into a Single Card

We all know that credit card interest rates are generally quite high, however the one exception is when banks offer promotional balance transfer rates.

Promotional balance transfer rates can be from as low as 0.9% for up to six months, which is a very attractive rate when you may be used to paying up to twenty times that amount!

By applying for a new credit card with a balance transfer option, you can roll all of your high rate credit card debts into a single low rate credit card.

Pros

The main benefit of a balance transfer is that you can reduce your interest rate dramatically whilst also reducing the number of cards you have.

By reducing the monthly interest charges so significantly, you should be able to reduce your balance much more quickly, which will further reduce your monthly interest charges.

Cons

Depending on the size of your credit card debts, you may not be able to find a bank that is willing to offer you a credit card limit high enough to swallow up all of your debts.

Promotional balance transfer rates generally only run for a period of three to twelve months, after which time the rate will revert back to standard interest rate.  In some cases it will revert to the cash advance rate, which may be higher than the standard rate.

Consolidating into a Personal Loan

A personal loan will generally feature a lower interest rate than a credit card, which means you can consolidate your credit card debts into a personal loan in order to reduce your interest bill.

One of the greatest benefits of consolidating into a personal loan is that you will have a set term for your debt.  Unlike credit cards which can go on forever, a personal loan will be set for a fixed period, after which time the loan should be fully repaid.

Pros

Instead of making monthly repayments on multiple credit cards, you can consolidate down to a single repayment on your new personal loan.

Due to the lower interest rate of your personal loan you will also be able to reduce your overall debt faster than if you still had to pay each credit card individually.

Cons

Unsecured personal loans will generally only be approved up to a certain amount, so you need to ensure that your total credit card debts do not exceed the maximum personal loan amount.

Consolidating into your Home Loan

If you have a home loan you may be able to consolidate your credit card debts into your mortgage.

In order for this strategy to work you will need to have sufficient equity in your home to match the total of your credit card debts, and you will likely need to have good conduct on your loan before the bank will consider approving your application.

Pros

A mortgage on a home will generally have the lowest rate of all forms of lending, enabling you to reduce your interest bill significantly, and therefore giving you the ability to reduce your debt faster.

If you already have a home loan which has always been kept up to date, the approval process for an increase will often be easier than if you were applying for a new credit card or personal loan.

Cons

Many people fall into the trap of consolidating their credit cards into a thirty year home loan and then paying the minimum repayment.  Although the interest rate is lower, you are now paying off your credit card debts over a much longer period.

If consolidating credit card debts into a home loan, it may be a good idea to keep that portion separate so you can concentrate on reducing that amount rather than letting it drag on over a thirty year loan term.

Which Option is Best?

The best option for you will depend on your own set of circumstances.  Not everyone will have a home loan that they can roll their cards into, and not everyone will quality for a new personal loan large enough to swallow up all of their credit cards.

If you know that you’ll be able to repay your debts in a short amount of time, a promotional balance transfer will secure you the lowest rate.  If you expect it to take longer to repay the debts, then generally your home loan will be the next best option.

If none of the options listed in this guide work for you, the best course of action may be to concentrate on reducing your spending and directing all surplus funds towards reducing your balances through extra repayments.