Is Debt Consolidation a Good Idea If You're Struggling? A Plain-English Guide

Debt consolidation merges multiple debts into a single loan or plan, leaving you with one monthly payment instead of several. It can lower the total interest you pay and make your finances easier to manage. However, it is not always the cheapest option and it will not fix the habits that created the debt in the first place.

What is debt consolidation and how does it work?

Debt consolidation means taking out a new loan or using a balance-transfer credit card to pay off several existing debts at once. You then repay the single new debt, ideally at a lower interest rate. Common vehicles include personal loans from high-street lenders such as Barclays, NatWest or Halifax, and 0 per cent balance-transfer credit cards from providers such as MBNA or Barclaycard.

To qualify for a competitive rate you generally need a reasonable credit score. If your score is poor, the interest rate you are offered may be higher than what you are already paying, making consolidation counterproductive.

What are the advantages of debt consolidation?

The main benefits are simplicity and potential cost savings. Instead of tracking five or six payment dates, direct debits and interest rates, you have one. That single payment is easier to budget for and harder to forget.

If you consolidate at a lower APR, you will pay less interest over the life of the debt. For example, clearing £8,000 spread across credit cards at an average of 24 per cent APR with a personal loan at 9 per cent APR can save several hundred pounds in interest, depending on the term. The Money Advice Service recommends always comparing the total amount repayable, not just the monthly payment, before committing.

What are the disadvantages of debt consolidation?

Consolidating can cost more in total if you extend the repayment period significantly. A lower monthly payment that runs for two extra years often means more interest paid in total, even at a reduced rate.

There is also a behavioural risk. Paying off credit cards through consolidation leaves those cards with a zero balance. Without discipline, it is easy to start spending on them again, creating new debt on top of the consolidation loan. Lenders including Barclays and HSBC often advise closing credit card accounts after consolidation for this reason.

Is debt consolidation a good idea if you are struggling with repayments?

If your debts are causing genuine financial hardship, consolidation alone may not be enough. A debt management plan (DMP), arranged free of charge through StepChange or the National Debtline, freezes interest and negotiates affordable repayments directly with your creditors. An Individual Voluntary Arrangement (IVA) goes further, writing off a portion of debt at the end of a fixed repayment period.

Consolidation is most suitable when you can afford your debts but find them chaotic to manage, and when you can genuinely access a lower interest rate.

How does debt consolidation compare to other debt solutions?

Will debt consolidation affect my credit score?

Applying for a consolidation loan triggers a hard credit search, which temporarily lowers your score by a small amount. Over time, consolidating and making consistent payments on the new loan can improve your score. Missing payments on the consolidated loan, however, will damage it. Experian notes that a single missed payment can remain on your credit file for six years.

FAQ

Is debt consolidation better than a debt management plan?

It depends on your circumstances. A consolidation loan keeps interest running and requires you to qualify for credit. A debt management plan, arranged free through StepChange, often freezes interest and requires no credit application. If your credit score is poor or your debts are very large, a DMP is usually the more realistic option.

Can I consolidate debt with a bad credit score?

Yes, but the rates you are offered may be high. Specialist lenders do offer consolidation loans to people with poor credit, but APRs can exceed 40 per cent, which often makes consolidation more expensive than doing nothing. Check your eligibility using a soft-search tool on sites such as MoneySuperMarket before applying formally.

Does debt consolidation affect my mortgage application?

A consolidation loan appears on your credit file and increases your total debt level. Mortgage lenders such as Halifax and Nationwide will factor it into affordability calculations. If you plan to apply for a mortgage within the next 12 months, speak to a mortgage broker before consolidating.

How long does debt consolidation take?

Loan approval can take as little as 24 hours with some lenders. The consolidation itself completes when the loan funds are used to clear your existing debts. The repayment period typically ranges from one to seven years, depending on the amount borrowed.

What happens if I miss a payment on a consolidation loan?

Missing a payment will be reported to credit reference agencies (Experian, Equifax and TransUnion) and will damage your credit score. Your lender may also charge a late-payment fee. If you think you will miss a payment, contact your lender before the due date; most have hardship teams who can discuss a temporary arrangement.

Should I use a debt consolidation company?

Be cautious with fee-charging debt consolidation companies. Free advice from StepChange, Citizens Advice or the National Debtline will assess all your options, including consolidation, without charging you. The FCA regulates debt management firms, so always check the FCA register before sharing your financial details with any commercial company.