Can credit cards help with debt consolidation?

8th December 2010

When the concept is heard for the first time, there can be some borrowers who can treat the idea of a credit card which enables debt consolidation with scepticism. Even though many cards at the moment do enable short-term solutions for 0% balance transfers and 0% on purchases, this idea is going to be harbouring interest in those who may need support with debt consolidation – and soon.

But how would a debt consolidation credit card work, if at all? Even though the interest rates which might be seen on the Barclaycard championing this feature are modest at 1.9% on any outstanding balances, they are nowhere near as extortionate as the rates which many bank accounts levy onto consumers who have taken out an overdraft – with one rate at 19%: ten times the credit card offering.

Of course, percentages can be rather difficult to relate to in monetary terms sometimes, but the difference between these two interest rates is profound. On a £5,000 outstanding balance remaining on a Barclaycard, the 1.9% rate would mean that there would be a £95 charge for the consumer to pay once the 12-month period of this promotional rate ends. In contrast, a £5,000 overdraft with many leading banks would mean that £960 would be paid for the privilege – a key difference in the wallet, and the progress that a person might be able to make on consolidating their debt.

Barclaycard is not the only lender who has realised the merit which some credit cards can have for debt consolidation purposes, with the AA being yet another company which has introduced a new service for their customers. The online-only credit card combines rewards with a nine-month window of no balance transfers and a one-year period of no interest on purchases. A representative from the financial services arm of the company had this to say: “At a time when many families are taking care with their finances. The card offers a real opportunity to make their money go further.”

MBNA meanwhile have also reassured consumers that some of the credit cards they offer include a three-month window for balance transfers to be made, with no handling charge incurred on their account. A spokesman from that lender said that they ‘know this product will appeal to many of our customers, particularly with those looking to pay down their debts over a short period with lower fees.”

With the notion of debt consolidation likely to be one of the leading lights for credit card companies in the coming months, the market for those who are looking to reduce the monthly repayments on money they owe is promising. However, it can still be worthwhile to remember that applying for credit cards can be detrimental to a consumer’s credit report if things don’t go to plan when applications are declined. What’s more, it can be important for those who are in bad credit to make a careful assessment about whether or not such a credit card is assuredly practical.

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