What is Debt Consolidation?

Debt consolidation involves combining multiple debts, such as credit card balances or personal loans, into a single, new loan. Like a financial spring cleaning, it helps you tidy up your debts and streamline your payments.

The point of debt consolidation is to simplify your finances in an effort to save money on interest. By consolidating your debts, you'll have just one monthly payment to manage, often with a lower interest rate than your original debts.

People typically consider debt consolidation to reduce their overall interest costs, simplify their finances, or get a better handle on their debt repayment.

You can consolidate debt in Singapore through one of two ways, both of which simplify your payments by combining them into a single bill. The option you should choose depends on factors like your credit score and debt-to-asset ratio.

With a 0% balance transfer card, you can move your existing credit card balances onto the new card and pay them off during the promotional period without incurring any interest. This can be a great way to save money and potentially get out of debt faster. However, you'll typically need good or excellent credit to qualify for these cards.

» Read more: 6 things to know about 0% interest credit card instalment plans

Leveraging a debt consolidation loan means you can use the loan amount to pay off your outstanding debts. You then repay the loan through fixed monthly instalments over a fixed term. This can be a good option even if you have bad credit, although borrowers with higher credit scores will usually qualify for lower interest rates. If you're considering this option, you might want to explore loans for bad credit.

» Read more: Best debt consolidation plans (DCP)

» Read more: How do balance transfer cards work?

Debt consolidation can't wave a wand and magically remove your debt, but it can be a valuable tool in certain situations. Here are some scenarios where debt consolidation can be beneficial:

• If you have multiple high-interest debts, consolidating them into a single loan with a lower interest rate can save you money and help you pay off your debt faster.

• Juggling multiple loan payments with different due dates can be overwhelming. Debt consolidation simplifies your finances by combining everything into one monthly payment.

• Debt consolidation can potentially improve your credit score by reducing your credit utilisation ratio and streamlining your payments.

For example, if you have multiple credit card balances with high interest rates, consolidating them into a debt consolidation loan with a lower interest rate could significantly reduce your monthly payments and help you become debt-free faster.

Debt consolidation can offer a sense of relief and control over your finances. By simplifying your payments and potentially reducing your interest costs, you can make steady progress toward paying off your debt.

Debt consolidation can simplify your finances and potentially lower your interest rates, but it's important to consider the pros and cons before making a decision. Ask yourself if you are able to take on additional debt and if you have a solid plan for managing your spending and paying it off. Two common options for consolidating credit card debt are balance transfer credit cards and personal loans. Balance transfer cards offer a 0% interest period, while personal loans provide fixed monthly payments and a set repayment term.

Assess your credit score, consider your debt amount, and evaluate your desired repayment timeline. If you aim to pay off debt quickly, a balance transfer card might be suitable. For larger debts and longer repayment terms, a personal loan could be a better fit.

Debt consolidation involves evaluating your existing debts, choosing a consolidation method (like a balance transfer or loan), applying for the chosen option, and then making regular payments on the new consolidated debt until it's fully repaid. If you have three credit cards with a total outstanding balance of S$10,000 and varying interest rates, you could apply for a debt consolidation loan of S$10,000. Once approved, the loan proceeds would be used to pay off your credit card balances, and you would then make one monthly payment on the new loan.

» Read more: How debt consolidation can improve your credit score over time

Debt consolidation can impact your credit score in both the short and long term. Initially, your score might slightly decrease due to a hard inquiry on your credit report. However, consolidating can improve your score over time by lowering your credit utilisation, reducing the number of open accounts, and establishing a consistent payment history. To maintain good credit after consolidating, make on-time payments, keep your credit utilisation low, and avoid opening new credit accounts unnecessarily.

» Read more: Will a debt consolidation loan affect your credit score?

Even with bad credit, you can still consolidate your debt. Options like secured loans, co-signers, or nonprofit credit counseling can help. However, improving your credit score before consolidating can lead to better loan terms and lower interest rates. You can do this by checking your credit report for errors, paying bills on time, reducing credit utilisation, and avoiding unnecessary new credit accounts.

» Read more: 4 ways you are accumulating debt without knowing it

Unfortunately, debt consolidation is not a one-size-fits-all solution. In some cases, it might not be the best approach to managing your debt. Here are a few situations where you might want to consider alternatives:

• If your balance transfer fees and loan origination fees outweigh the potential interest savings it might not be worth it. In this case, focus on budgeting and managing your cost of living to pay off your existing debts faster.

• While a longer repayment term can lower your monthly payments, it also means you'll pay more interest over the life of the loan. If you're considering a long-term consolidation loan, carefully evaluate the total cost and explore ways to pay off your debt more quickly.

• Debt consolidation options like home equity loans or borrowing from your CPF account come with significant risks. If you're unable to make your payments, you could risk losing your home or jeopardising your retirement savings. If your debt is out of control, consider seeking financial assistance or exploring debt relief options like a debt repayment scheme (DRS). If you find yourself struggling to pay your credit card bill, read our step-by-step guide to clearing your credit card debt.

» Read more: Step-by-step guide to clearing your credit card debt