If you’ve been down debt forum rabbit holes, or ferociously Googling, you’ve probably seen ‘debt consolidation’ being thrown around. But what is it?
Debt consolidation 101
Debt consolidation means combining multiple debts into one. Instead of making separate payments to different lenders, you take out one new loan or credit product to pay off your existing balances, then repay just that one.
It’s most commonly used for unsecured debts, like credit cards, overdrafts or personal loans.
How debt consolidation works
There are a few different ways to do it:
1. Balance transfer card
Move your credit card balances to a new card with 0% interest for a set time. Watch out for transfer fees and be sure to pay it off before the interest-free period ends.
2. Personal loan
Take out a loan to cover all your existing debts. This gives you one fixed monthly payment over a set term, often at a lower interest rate than credit cards.
3. Home equity loan or remortgage
Use the value in your home to borrow a lump sum. This can come with lower rates, but take into consideration that it is higher risk. Missed repayments could mean your home is at stake.
Is debt consolidation a good idea?
Potential benefits
Simplified payments: it’s easier to manage one bill than several.
Lower interest: especially if you qualify for a low-rate loan or 0% balance transfer.
Faster payoff: more of your money goes towards clearing the debt.
Possible drawbacks
Fees and charges: some loans or balance transfers include fees that eat into any savings.
Longer repayment periods: Remember, you’re turning all of your debts into one big one, so it’ll take you much longer to get to the finish line. This could mean paying more overall in interest, even though the rates are likely lower.
Risk to assets: with secured loans, your home is on the line.
Does debt consolidation hurt your credit score?
It can. But it can also help it. Taking out a new loan or credit card might cause a small initial dip, but if you make repayments on time and reduce your total debt, your score could improve over time.
How Zilch fits in
Debt consolidation isn’t for everyone. If your debts are smaller or more short-term, using Zilch could be a helpful way to spend while you work on paying off your debts.
Pay over 6 weeks: spread out purchases into four interest-free payments instead of relying on high-interest credit cards. Fees may apply.
Pay over 3 months: just like 6 weeks, but 3 months. Feel the hit even less with more time. Fees may apply.
Quick note: both Pay over 6 weeks and Pay over 3 months are credit offerings – if you don’t repay them right (on time, or at all) then you could negatively impact your credit file.
Pay now, earn up to 5% back in Zilch Rewards: Get something back on those everyday essentials – like up to 5% in Rewards when you use Zilch to Pay now on the weekly food shop. Then, spend them on the next one. Smart. Savvy. Seriously good.
Transparent costs and reminders: making it easier to manage what you owe without falling behind.
Zilch isn’t a replacement for consolidation, but it can be part of a bigger debt management strategy. Especially if you’re trying to avoid building up more high-interest debt in the first place.