Many regular readers of this column have got in touch recently to ask about how they can effectively reduce their debts without damaging their credit reference files.

This is a tricky question to answer– but I will in this column!

There are a range of options available for people who can’t afford their debts, but there are always consequences. If you negotiate a reduced payment for the money you owe then this will inevitably have an impact on your credit file. But that doesn’t mean all is lost.

Can I combine my debts?

Lots of people have credit card debt, loans and overdrafts, along with buy now, pay later debts or high-interest short term loans. These debts may not be particularly high, but when you combine them all on one spreadsheet, you may be shocked by how much you’re paying.

Debt consolidation is where you bring some or all of your debts under one roof. There are lots of ways you can do this, but you’ll need to work out what you gain and lose from the options.

Zero-interest balance transfer credit cards

Signing up for a zero-interest card allows you to consolidate debts from existing credit cards and other loans too. The idea is you get an interest free period – say, two years – for the combined debt. If you pay off the debt in that time you don’t pay a penny in interest.

The catch is you have to pay a fee to do this – usually a small percentage of the debt. Work out what this will be before taking out the card.

Zero-interest cards are great ways to reduce your debts without paying more money. But don’t forget the golden rules:

  • Cut the card up on receipt and never use it. The interest on new purchases can be terrifying.
  • Bear in mind that the interest rates when the deal ends can be higher than a normal credit card. So be disciplined!
  • Work out what you need to pay each month to clear the card during the interest-free payment, set that as your monthly payment and set up an automatic payment so the money vanishes from your account on the due date.
  • Put the date the interest-free period expires – but one month before – in your diary or phone calendar. This is so you can find another deal if you haven’t paid everything off.

If you want to look at some of the options, MoneySavingExpert has loads on their website. 

Consolidation loans

If you’ve got debts outstanding that you can’t transfer on to a zero-interest credit card you might want to turn what’s left over in to a personal loan.

Bear in mind that the quote for a loan can be different from what you are ultimately offered. This will be decided on:

  • Your credit score.
  • How much you borrow – though annoyingly, the more you borrow, the lower the rate goes.
  • How long you need to pay the debt off.

This is where you have to do a few calculations. Tempting as it may be to borrow more to get a lower rate, this isn’t likely to be the right answer for you. You can reduce the amount you pay each month by agreeing to a longer payment term. But this will also cost you more in the long run.

Credit checks

Don’t forget that when you apply for a loan, credit card or form of credit, the lender will usually run a credit check with a credit reference agency. A ‘hard’ check will leave a marker on the file. Too many in a short period of time will impact on your credit.

However, a soft credit check doesn’t leave a marker on your file. It’s a good way to check to see if you might get a yes before formally applying. So make use of this option as it’s the best way to find out if you might succeed with a credit application. Many comparison sites allow you to do a soft check on their websites before applying.

Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist.

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