Is consolidating debt a good idea?

If you are struggling to manage your mortgage payments, loan/credit card payments and your bills you might be wondering whether consolidating some or all of your debts to reduce your monthly outgoings might be a good idea. Well it depends on a variety of factors and everyone’s situation is different. Let’s look at the pros and cons to doing this.

Reasons why you may wish to consolidate your debts

Firstly, you may be struggling to meet your mortgage payments, loan and hire purchase payments, minimum payments on credit cards and your bills. This may be the result of the level of unsecured borrowing accumulating over the years due to the ease of obtaining credit for essential or luxury items and now becoming unmanageable. It could be the result that you or your other half may have seen a reduction in income either by way of a job loss or a reduction in income as a result of the government’s economically damaging lockdown policy. Either way it may well cause you stress, worry and anxiety.

Secondly, it may be that you are concerned for example with a high level of borrowing on credit cards and the high interest rates credit card companies charge from purchases where the card balance is not paid off each month, or after any attractive low cost balance transfer deal has come to an end. You could find your interest rate goes from 0% to as high as 39.9% APR! This may mean you are barely reducing the balance over time and paying a lot of interest.

What are the risks?

If you are increasing your mortgage to repay the unsecured borrowing and in due course you cannot meet the increased mortgage payment you could be at risk of losing your home if you can’t meet the mortgage payment. If you hadn’t consolidated and managed to at least make your lower mortgage payment then the worst that could happen if you did not meet your financial commitments on your loans or credit cards might be you receive a default notice or CCJ (County Court Judgement). Whilst these undesirable outcomes could affect your ability to get a new mortgage or increase the rate you could pay on any future mortgage deal, you would not lose your home as long as you’d made the mortgage payment.

There also might not be a benefit if say a loan commitment is due to end soon (thus improving your monthly cash flow) or you are able to transfer the credit card balance to a new 0% deal where in time you can get the card paid off.

There is also the risk too that once you have consolidated your credit card debts you might be under the false illusion that you have these available balances of easy credit (not money) to just use again and the cycle of debt payments putting pressure on your finances starts again. If you’re going to repay the debts then cut up the cards!

Credit cards can offer protection for goods and services

That said if you can be responsible financially and just use a credit card to buy goods and services purely as a payment mechanism and pay it off every month that’s just fine. Buying large value goods and services such as a new sofa or holiday using a credit card can be a good idea because it can give you some protection for non-receipt of those goods and services under Section 75 of the Consumer Credit Act as long as the value of goods of services is between £100 and £30,000. This would have been useful for many that had paid for their holiday, but not been able to go due to the travel restrictions and the holiday company, airline, or hotel had not  issued a refund. You would then submit a claim under the Act. That said, you may be able to use the Chargeback scheme to make a claim if the cost of goods & services are less than £100 or you use a debit card. Having access to both schemes though gives you additional protection.

Get good advice

A good mortgage adviser would be able to advise with regards to whether consolidating some or all of your unsecured borrowing is in your best interest. They will take all of these factors into account when giving their recommendation about your mortgage. 

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.