Financial Success Guide

How To Get Rid Of Bad Debt Through Debt Consolidation

Section 9 Module 3

What is 'Debt Consolidation'

Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms: a lower interest rate, lower monthly payment or both.

You can use debt consolidation as a tool to deal with high-interest credit card debt.

Methods of Debt Consolidation

Balance Transfer

There are several ways you can lump debts into a single payment. One is to consolidate all their credit card payments onto one new credit card – which can be a good idea if the card charges little or no interest for a period of time – or utilize an existing credit card's balance transfer feature (especially if it's offering a special promotion on the transaction).

Personal Loan

Personal loans often charge interest somewhere between 3-5% per annum, while credit cards charge around 36% per annum.

  1. It therefore makes sense to take out a personal loan with a low interest rate, and a reasonably long payment term, to make the monthly payouts affordable. 
  2. You can then use the money from the personal loan to pay off all the credit cards, and then cancel them with the bank.
  3. Do not keep an empty credit card active, simply because you haven’t got out of the habit of using credit cards, and may rack up debt again.
  4. Make sure, you physically cut up the card, after the debt is payed.