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Find out if credit consolidation is right for you

Analaura Luna

Debt is like a disease: it makes you feel rotten, seriously impacts your quality of life, and it can be tough to get rid of - that's why credit consolidation is sometimes treated like the penicillin of sick finances. But can one quick jab really solve all of your problems?

Well, just like antibiotics can’t kill all bacteria, credit consolidation won’t always be an effective debt management strategy. And if you’re not careful you can end up accumulating a ‘super debt’ that is just as scary as any super bug out there. That doesn’t mean that credit consolidation can’t be a good way to eliminate your debts (any more than it means that antibiotics aren’t a good way to kill most bacteria) but it does mean that fixing your finances requires a bit of planning. If you’re considering consolidating your debts onto one credit card, here are some things to think about:

• According to Canstar Cannex, there are 288 personal credit cards available in Australia, and 254 of them allow you to transfer a balance. Many of them also have special offers on interest rates that can make them attractive to people considering debt management strategies. However, the low introductory interest rates of many of these cards lapse after six months, and the rate you have to pay once the honeymoon is over can be huge.

• Moving from one card to another at the end of each low interest ‘honeymoon’ might sound like a good idea, but it can have long-term consequences. Every time you change cards a notation is made on your personal credit file. If you change cards too often, card providers will probably start thinking you’re a risky prospect and your applications will be more likely to be rejected – leaving you stuck with paying the higher interest rate on your old card.

• Let’s be honest: if you’re in debt, credit cards are a likely culprit. Australians owe around $33 billion in credit card debt – and having a card is always going to be a temptation. Using your new credit card will only create more debt, and since many cards require you to pay off your transferred balance first, you might be paying off the interest you accrue on your most recent purchases for a long time.

Okay, now you’ve heard the doom and gloom, you’re probably ready for the ‘secret’ solution, but the big secret to debt management is actually pretty straightforward: it’s about making the commitment to pay off as much as you can each month and changing your spending habits so you’re not creating more debt as you go along. Take a good look at how much you owe, how much you can afford to repay every month and how disciplined you can be about managing a credit card. If your debt is relatively low and you’re positive that you can make the repayments before the introductory period runs out, transferring your debts to one low interest card might be a good strategy. If your debt is a bit bigger, or you know you won’t be able to resist the plastic temptation, think about consolidating your debts in a personal loan, or locking your cards in a drawer and paying them down by making the largest repayments on the card with the highest interest rate first.

While credit consolidation can be an effective part of a debt management strategy, the best medicine for your finances is your commitment. By steadily putting money toward your debts and making an effort to spend differently you’ll be able to reduce, and ultimately eliminate, what you owe, and find yourself living a debt-free lifestyle. And won’t that make you feel better?

If you liked this article you might also be interested in these articles about money management and debt reduction:

Take control of your debt

How to reduce your debt without losing your mind

Want more? Take a look at these articles for even more debt management help and advice.

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Author's Biography

Analaura Luna is an author, wealth adviser and founder of Your Family Your Money. Your Family Your Money’s goal is to simplify traditionally complex financial strategies, demystify financial jargon and debunk common financial myths, becoming every family’s first stop for financial advice, information and inspiration.