How to clear your credit cards

Consolidating your debts effectively means that you're taking out one big loan to pay off all of your smaller loans. You'll usually end up extending the loan term (the time it takes for you to repay the debts completely), and ideally should end up with a better interest rate - although this isn't necessarily the case.

It's true that putting all of your debts in one place makes them easier to track, and therefore it can seem like a good option. However, you do run the risk that you'll end up paying out far more in interest than you would have done otherwise, thereby making your debts significantly more expensive overall.

Most of the adverts for debt consolidation make it seem like a really easy, affordable way to get back in control of your debts; however, many of the loans that are marketed as being for debt consolidation are secured. This means that you're giving the lender the right to repossess your property if you're unable to keep up repayments - something they don't really make clear in the glossy ads!

For this reason it's really important that you take the time to weigh up the pros and cons of consolidating your debts before you make a decision as to whether this is likely to be an option that will help you clear your debts quickly.

Pros:

• You have one payment that you make each month.
• You only have to think about one interest rate.
• You can reduce the rate that you are paying on your debt overall if you get the right deal.
• You can often free up more of your cash each month by extending the loan term so you make smaller repayments.

Cons:

• Taking a secured loan puts your home at risk if you cannot keep up the repayments.
• Some companies will charge you a high rate if your credit score is poor.
• You are generally stretching the period you are paying off a debt, which means you pay more overall.
• You may be penalised for paying off certain loans early
• If your consolidation loan doesn't offer a lower rate than you're paying on your debts, you'll end up paying more

Of course, if you do decide that it's a workable option for you - and it may be - it's really important that you choose a loan that makes your debts cheaper. Ideally you should only consolidate the debts that you're able to get a lower rate on. You should also keep the loan term as short as you reasonably can so that your debt doesn't become too expensive. Finally, if you're able to consolidate your debts with a low rate unsecured loan, it's generally advisable to do so.