Debt Consolidation: When It Helps — and When It Doesn’t
Rolling multiple debts into one loan or 0% balance transfer can lower costs and simplify payments — but only if the numbers (and your habits) line up. Here’s how to decide.
1) What Is Debt Consolidation?
Debt consolidation means replacing multiple debts (credit cards, overdrafts, store cards, small loans) with a single new product — usually a personal loan or a 0% balance transfer credit card. The goal is to reduce interest, simplify payments, and set a clear payoff date.
2) When Consolidation Helps
- Lower interest: New rate is meaningfully below the blended APR of your existing debts.
- Fixed payoff plan: Personal loan with a fixed term stops the “minimum payment treadmill.”
- Fewer fees: Transfer and arrangement fees are small relative to the interest saved.
- Better behaviour: You’ll stop using the old credit lines (or close them).
3) When It Doesn’t Help
- Longer term cancels savings: A lower APR spread over more years can cost more overall.
- High fees: Balance transfer or arrangement fees eat the benefit.
- Credit score risk: Multiple applications can lower your score short term; higher utilisation on one card can too.
- Continued spending: Keeping old cards active and adding new debt defeats the purpose.
4) Worked Example
Current debts:
- Card A: £2,500 at 26.9% APR
- Card B: £1,800 at 22.9% APR
- Overdraft: £600 at 39.9% EAR (approx.)
Option 1: Consolidation loan £4,900 at 12.9% APR over 3 years → one fixed payment, clear in 36 months. Total interest roughly £1,000–£1,100.
Option 2: 0% balance transfer card, 24 months, 3% fee → pay ~£208/month to clear in time. Total cost ≈ £147 fee, if you never miss a payment or spend.
Exact results depend on compounding and issuer rules — use a payoff calculator for precision.
5) Checklist Before You Switch
- Compare total cost, not just APR (include fees and term length).
- Check for early repayment penalties on current loans.
- Run a soft-search eligibility check to avoid unnecessary hard checks.
- Set a fixed monthly payment that clears the balance inside any promo period.
- Close or freeze old credit lines to prevent re-borrowing.
- Keep an emergency fund so you don’t fall back on credit.
6) Alternatives to Consider
- Snowball/Avalanche: Keep debts separate but pay extra to smallest balance (snowball) or highest APR (avalanche).
- 0% Money Transfer Card: Moves cash to your bank for overdrafts — fees apply.
- Debt Management Plan (DMP): For severe cases — negotiated lower payments/interest via a charity.
7) Key Takeaways
- Consolidation works when it lowers total cost and you stop new borrowing.
- Watch fees and term length; a lower rate can still cost more over longer periods.
- Automate payments and close old accounts to lock in the benefit.
- Use CalcFlow’s calculators to compare scenarios with your numbers.