Should I Consolidate All My Debts Together?

Debt consolidation is only a good idea when it’s going to cost you less in interest over the term, NEVER if you just want more money to spend by reducing your monthly payments. If you want it to feel less “messy” or you have to reduce your monthly outgoings, then here are a few alternative solutions.

Before I start, I am assuming here that you have debt that is charging you high interest every month and you’re getting stressed out about it. Consolidation is probably not the answer, so let’s take a look at what might be:

0% credit cards

In order to source the best cards out there at any given time, go to a few comparison sites, check the Love money and Money Saving Expert (Martin Lewis) web sites as a starter for 10 for the latest deals and apply for the ones with the longest 0%. If possible select the cards that allow you to see if you will be accepted BEFORE you apply. This means that there won’t be a hard search on your credit record. You don’t want too many of these, it makes you look bad.

Please remember that most of these sites (if not all!) get paid to refer you so check a few to get a full picture before you decide.

If you have quite a bit to transfer, go for cards will give you the most, (as you will need less cards to service your debt) then compare the transfer fees with how long the 0% runs for.

Card Name         Limit              Transfer fee        Term of 0%         Ave.% P.A.

NEW Card 1        £5,000.00            2.90%             24 months             1.45%

NEW Card 2        £2,000.00            1.90%              18 months            1.27%

NEW Card 3        £1,000.00            4.20%               36 months           1.40%

These figures are not strictly accurate as you will be paying it off with minimum payments over the term, but for comparison purposes it’s there or there about.

There are a number of methodologies on how you might want to go about this, but personally my focus would be on getting your interest payments as low as possible so that you can throw every piece of available cash at it and actually bring the balance down.

Assuming that you manage to get at least one 0% card, transfer the balance from the card with the HIGHEST INTEREST rate over to the new one. You can usually use about 90% of your new available balance on a transfer. So if your new card has an available balance of £1000, you can use £900 for a transfer. The transfer fee is applied immediately and I STRONGLY recommend, in fact I insist that as soon as you activate the card you set up a direct debit for the minimum payment at the same time as If you fail to pay they will usually withdraw the 0% offer

It goes without saying that you should NEVER actually use this card for purchases. If you did use it after you’d transferred a balance you will pay interest on anything you buy.

So let’s say you manage to transfer £5k to a 0% card, you pay the balance transfer fee and you set up a DD for the minimum every month, everything is well with the world.

At this point; put the card in a safe place and walk away!

If for some reason you don’t do this and you spend say £100 on the card, this spend is NOT interest free and any payments you make ONLY go off the 0% balance! That £100 sits there generating interest payments every month and there is a high probability that NONE of your payments will touch it until the entire 0% balance is cleared. 

This used to be the case with all cards but some do proportion the payment against your interest free and chargeable balances these days but I’d still recommend that you don’t do it.

The other thing to consider is your significant other. Personally I’ve never had one of those that had any impact, input or anything at all to do with my financial management strategies, but I realise that this is not always the case. Some people may not see the whole picture of what you are doing and either freak out at the debt or see any positive balances or investments as “spending money”. I don’t have a solution for you on this one I’m afraid, but as I do know people who have been burned this way, so just be careful.

Ok so that’s done, but maybe you still have some costly balances on the old cards that you didn’t manage to transfer.

Other Options

Another way can be to look for lifetime balance rates. These often are free balance transfers that will charge you a % say about 6.9% for the life of the balance. Not as good at 0% but better than what you are paying, so look at these next.

If you have any cards that you are not using and are empty but you never got around to cancelling them (this is good btw), it might be worth getting in touch with them to see if they have any offers on for transfers or purchases, always worth a punt.

If you still need more, ring your existing provider and say that you are going to transfer a balance as you’ve found a better deal and ask them what they can do for you before you take your business away from them. I would suggest that you DO NOT say that you are having trouble paying, I’ve heard stories where this has been akin to kiosk Keith dropping the shutter on any possible good rates coming your way for the foreseeable future!

Quite often I have found that when I pay off a balance from a card and leave it dormant for a while they start to send me new offers. Being a little patient might also serve you well here. If you use a 0% to pay one off, wait a bit and see if the old card provider gives you any offers (or call them?) you could then use this for any other balances you still have.

Loan and re-mortgage options are of course more expensive.

Do Your Own Consolidation!

There is a debt reduction method called “the snowball method”. The suggestion is that you pay off the smallest balance first. Many people use and even recommend this method because it gives people a sense of progress when clearing down their debts. It’s crazy if you ask me – I’d always go for the most expensive first but I think its part of the reason why people feel better consolidating into a loan or mortgage, even though it costs far more in the long run.

I totally understand why one payment feels better, so do it for yourself by using a totally separate account and without paying out huge sums of money that you don’t need to.

I have a 2nd current account for this purpose and I strongly recommend that you do this too, especially if you have lots of small payments going to various institutions and it all feels a bit messy and stressful.

Advantages of a 2nd account just for debt payments;

•             You might get money for opening a new account (cherching!)

o Note here I’m not recommending switching – just opening a new one so you might not get this kind of bonus.

•             You should try to open one that gives you interest on your balance (more cherching!)

•             You can have a single payment from your main account into the second one which makes it feel neater and consolidated as this is your “direct debt debit”, or DDD.

•             You are not tempted to spend any “spare cash” as it’s already been “spent” on the debt.

If you have managed to move all your cards to 0% then just pay what you would have normally paid against your entire debt into this account and let the balance stack up so that when the cards run out of their 0% you can pay them off. This way you are not tempted to spend the money you are not paying out in interest.

The aim of the game here is to achieve AT LEAST the same value in assets as we have in debt so until you achieve this equilibrium, you are still in debt. DO NOT spend anything that looks like its left over.

Also, if you have any debts that are still charging you, you can use the residual balance at the end of the month to pay these down.

Psychologically I thing that this structure helps you to track your progress and make clear strides towards a defined goal, which in my mind has to meet 2 criteria:

1.            Never pay interest (that’s more than you can earn from that same pocket of cash)

2.            Always have at least as much in assets as you do in good debts

Moving Debt To a Mortgage

This is not something that I would not normally recommend but if you have tried everything else, this might be your last resort so let’s see what this might do for you.

A lot of people have quite a narrow short term focus when they add their expensive debts to their mortgage, they see their monthly outgoings reduce, which of course is brilliant because they now think that they can spend more, but keeping your mortgage over the long term even though the rate is low, really does rack up the interest. 2.5% per year is a decent rate for a short term credit card but the miracle of compound interest works against you over the long term if that’s your mortgage interest rate.

Just adding £10k to your mortgage over say 15 years could cost you and extra £2k, that’s assuming you have a repayment mortgage, it’s closer to £3.8k if you’re on interest only.

Don’t get me wrong, I’m a huge advocate for low cost credit but only WHEN you are saving that money in another HIGHER INTEREST pot, it’s all about the balance. If this is your last resort to get rid of expensive debt, then so be it but be careful that you don’t clear your debts with a re-mortgage and then think you have money to spend, the chances are that you don’t. Low interest credit and consolidated debt is never a licence to spend more money that you still don’t have.

If you have already consolidated your debts and are tied in to something, don’t panic, just start putting the amount you are saving by consolidating in a decent savings or investment account, at least this way you are moving forward instead of treading water, or worse – going down!