Debt Consolidation

Debt consolidation makes sense but only if you do it the right way

Most unsecured debts are normally at a higher rate than secured loans. Most people don't even know what rate they are paying on there credit cards - below are a few examples (as I write this base rate is 0.5%):

• Barclaycard Initial credit card 27.9% APR
• Barclaycard Gold credit card 19.9% APR
• MBNA Credit card up to 34.9% APR depending on who you are
• Northern Bank Gold 36.2% APR
• RBS platinum Credit card 16.9% APR
• Abbey Credit card 18.9% APR
• Post Office credit card 19.9% APR

So as you can see from the above, if you had balances on any of the above or similar then debt consolidation would seem like a viable option.

If you can pay, say, half the interest rate that you are currently paying then debt consolidation would seem like a very sensible route to take.

Used in the right way it can be but please see below for the common pitfalls people make in debt consolidation and sometimes end up in a worse position because they have not considered the below advice.

The first golden rule of debt consolidation

Be honest with yourself, do you actually want to consolidate your debt or just have a new loan to spend?

If you are going to take debt consolidation seriously then you need to do it the right way. Pay off all your credit cards and expensive debt and cut them up and cancel future access to them.

This is the most common mistake people find themselves making when it comes to debt consolidation. There consolidate all their debt into one larger loan at a lower rate but leave their credit cards open and in a year or so they have gradually built their balances back up to where they were.

The second golden rule of debt consolidation

Look carefully at what you are consolidating and especially the length of time you would expect yourself to pay the debt of completely.

If you think you could clear all your debts in say 6 years then don't go and take a secured loan over 20 years as you will end up paying a lot more interest.

(Although this is not as bad as it was a few years ago when lenders were allowed to use rule 78 to calculate your redemption of your loan. Before this was abolished you could have paid anything from 6 to 12 months additional interest when you wanted to pay your loan off - now it is about 1 month).