Debt consolidation vs credit card refinancing

Many Australians are struggling with debt as evidenced by the latest stats which indicate that the personal debt levels in Australia are at around $144 billion of which around $32 billion is credit card debt, equating to about $4,300 of debt per cardholder.

If you are one of the many Australian’s who are struggling to meet the repayments on your debts the good news is that there is path back to a debt free position. This article will focus on two proven approaches to reducing personal debts, credit card financing and personal loan consolidation, and help you assess the merits of each of these approaches relative to your personal circumstances.


1. Credit Card refinancing

If you have credit card debts or personal loan debts credit card financing can help you consolidate these debts and buy you some time to repay the debt. The primary proposition behind credit card financing is focused on the transferring of your current debt to a credit card that has an interest rate significantly lower than those on your current credit accounts, be they personal loans credit cards or store cards.  These credit cards are commonly referred to as Balance Transfer Credit Cards and are offered by all the major banks, building societies and credit unions.


How does a Balance Transfer Credit Card Work?

These credit cards are standard credit cards that feature a promotion, this promotional offer is the balance transfer. This balance transfer features a low interest rate that is applied to the debts you transfer to the card, for a fixed period of between 6 and 24 months. During this balance transfer period you will be saving on interest charges as the interest rate charged on your debt will be significantly lower than the rates you have previously been charged, with many balance transfer cards offering 0% p.a. rates.


How will a Balance Transfer Credit Card help me reduce my debts?

As you will be saving money on interest charges more of your repayments will be contributing to repaying the principal amount on the debt, and less on the interest, which means you have a greater chance of clearing your debt.

Secondly by consolidating your debts onto a single credit card you have simplified the process of managing your debt to a single repayment each month, this is designed to help you focus on this one repayment and remove the stress associated with managing the debts with multiple lenders.

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How do I maximize the interest savings from credit card refinancing?

To maximize the benefits you derive from a balance transfer credit card follow these 5 tips:

  1. Select a balance transfer credit card with the lowest balance transfer rate, if your credit profile is good you should be able to successfully apply for a 0% p.a. card.
  2. Choose a balance transfer period that gives you sufficient time to repay your total debt amount before the end of the balance transfer period, as once the period expires any balance of debt remaining on your card will attract the revert interest rate of the card which will be significantly higher than the balance transfer rate.
  3. Avoid using your balance transfer credit card to make any further purchases or cash advances as this will simply cancel out any of the benefits that you are deriving from the low interest balance transfer period. Any new purchases on your card will attract the purchase rate and compound your debt position.
  4. The effect of making purchases with a balance transfer credit card is that any repayments made against the card balance will not go toward clearing the debt transferred to the card. Following Government reforms in July 2012, credit card providers must direct repayments against the debt in descending order, from transactions that attract the highest interest charge to those that attract the lowest. With a balance transfer credit card where purchases have been made the order is therefore likely to be:
  • Any Balance Transfer Fee
  • New Purchases Made on the card
  • The Balance Transferred

This repayment order reduces the total interest you will end up paying, though may hinder your ability to clear the total debt transferred to the card as the debt increases with every new purchase made on the card.

Don’t assume that you can easily transfer to another balance transfer credit card when the balance transfer period ends, focus on clearing your debt not on continually shifting it without reducing it. While new customers are always welcome, credit card providers still tend to shy away from customers who display the traits of high credit risks. Switching from one credit card to another shows that you could be one, and this adversely affects your credit score.


How do I select the best balance Transfer credit card for debt consolidation?

  1. Make sure you are eligible to apply - You will not be able to consolidate your debt onto a balance transfer credit card issued by the same bank as that which your debt is on. So if you have a Westpac Credit card with a debt of $3,000 on it you cannot transfer this to a Westpac balance Transfer Credit card.


  1. Consider the cards fees in your assessment - Balance transfer credit cards that charge no administration or set up fees can be found, though the majority tend to charge a balance transfer fee of 1-2% of the debt being transferred. This fee will be added to your balance from day one of the balance transfer period.


  1. Never, Never, Never miss your monthly repayment - Card providers generally penalize cardholders who miss repayments on balance transfer credit cards very heavily, in the worst cases this can see the balance transfer interest rate being revoked, and the debt transferred incurring interest charges at the credit cards revert rate, which will be significantly higher than the balance transfer rate.


  1. Make sure the balance transfer credit card will accept your type of debt - Personal Loan Transfers are not widely accepted by the card providers with only Virgin Money and Citi accepting Personal Loan transfers to their Balance Transfer cards.



Personal Loan Transfer


Debt consolidation Personal loans or Personal Loan Transfers are they are often referred to, are designed to consolidate your debts into a single unified loan, with the requirement to make one monthly repayment for a fixed period. This fixed period, which is generally  between 3 to 5 years, is designed to provide a definite structure and a fixed schedule, which is proven approach for those who lack the discipline needed to repay their debts on time.

The most common forms of debt that are consolidated into a personal loan are Credit Cards, Store Cards, Car Loans and Personal Loans.


How does a Personal Loan help me repay down my debt?

Debt consolidation is the process of combining multiple debts into a single one with the objective of minimizing your expenses, making your debt more manageable and creating pathway to a debt free position. For example, if you owe $1,500 on your ANZ credit card, $2,200 on your David Jones store card, and $6,000 on your Commonwealth bank personal loan, you could consolidate these three debts onto a single debt consolidation loan of $9,700. By consolidating these debts you will have a single repayment and will no longer need to deal with 3 different interest rates and multiple fees, which can deliver significant savings in time, stress and of course dollars.

Although the interest rates on debt consolidation loans are not generally as low as those offered by Balance Transfer credit cards they do tend to be lower than the interest rates of standard credit cards, store cards and many personal loans. These lower interest rates will translate to lower interest charges and alower repayment, freeing up more cash to repay the debt as opposed to interest charges.

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How will a Personal Loan help me reduce my debts?

Consolidation of debts to a Personal Loan is an option preferred by customers who believe they need a longer time period over which to repay their debt, with periods of up to 7 years available, compared to balance transfer credit cards which tend to have maximum terms of 24 months.

If the temptation of further credit is to hard to resist the personal loan option is worth considering, as unlike a balance transfer credit card you cannot make purchases using the loan, unless you have made extra repayments above those required.