Debt consolidation guide

What is debt consolidation?

If you’re struggling with debt, you may have heard of the term debt consolidation. Debt consolidation refers to combining multiple high-interest debts, such as outstanding credit card balances, personal loans, or store card credit into a single debt, leaving you with one monthly repayment to keep on top of.

To consolidate your debt, you can apply for a new loan or credit card with a balance that covers your existing debt and use it to pay off your outstanding balances.

There are three possible options:

  • Secured debt consolidation loans, backed by a high-value asset like your home
  • Unsecured debt consolidation loans, based on your income and credit rating
  • A 0% or low interest balance transfer credit card

When is debt consolidation worth it?

Debt consolidation may be a good option if you have multiple debts with high interest rates that you can clear with one single loan or credit card. Secure a lower interest rate on your debt and you could save money and simplify your life. If you also use the opportunity to cut down on your spending, debt consolidation could give you the wriggle room you need to get back on track with your finances. 

However, it’s only worth it if you can afford the monthly repayments. Review your finances carefully to work out what you can realistically afford to repay. With a balance transfer credit card, you’ll need to keep up with minimum payments and ideally clear the debt before the end of any introductory deal to avoid ending up on another high interest rate.

An unsecured loan or new credit card may not be an option if you have a low credit score. If you are approved, you may end up on a high APR and end up paying more overall. Make sure to factor in any fees and charges too, as they could counteract any potential savings.

If you’re regularly using credit to pay for things, debt consolidation could exacerbate the problem. If you fail to keep up with the repayments on a loan that’s secured against your home, you could lose your home. 

Get impartial advice before you decide what steps to take to manage your debt. Charities like Step Change offer free, confidential advice to help you find debt solutions for your circumstances. A debt advisor may be able to negotiate on your behalf with your creditors and agree a debt management plan with more affordable monthly repayments.

Can debt consolidation loans affect my credit score?

Each time you apply for new credit it can cause a temporary drop in your credit score. A new lender will perform what’s called a ‘hard’ search on your credit history, and this will knock your score down by a few points. Each time you open a new account with a creditor it lowers the average age of the accounts you have open, which can also cause your score to drop.

Taking out personal loans for debt consolidation may cause a drop in credit rating. However, it is possible to rebuild your credit score over time if you consistently keep up with the repayments and prove to future lenders that you’re capable of managing credit responsibly. If you miss payments, it could really harm your credit score, so it’s important to get expert advice on possible debt solutions before you enter into any agreements.

Updated July 2023