Written by: Nick Bregozzo

Australians have the ideal opportunity to consolidate debts into a single personal loan or into the lower mortgage loanby refinancing. The Reserve Bank of Australia surprised many economists who were predicting a rise in the official cash rate when the Board decided to keep the rate at 3 per cent.

Meanwhile banks have relaxed some lending criteria and are showing a willingness to accept loan applications again. The global economic crisis has taught most people the value of debt reduction and this is the ideal opportunity to consolidate your debts to manage the debts and reduce your debt faster.
When you consider refinancing for debt consolidation purposes, you need to think about your personal circumstances.

  1. Make a list of all your debts.
  2. Consider your income and general expenditure.
  3. Decide how much you can afford to pay off on all your debts every pay period.

Most Australians have one or two credit cards, a mortgage, a car loan, and store cards. Credit and store cards always attract higher interest rates than a mortgage, a car loan, or a personal loan. Usually, the credit cards have interest rates between 16 and 23 per cent, while store cards can have interest rates up to 28 per cent.

By reducing your credit card and store card debt, you will save money on interest. Having multiple loans and credit cards means you have to make multiple payments every month, just to meet the minimum monthly payment requirements. By consolidating your debts into one loan, you can save money.

Some people will swap to a new credit card, especially as the major banks are all offering low interest rates for a few months on balance transfers, to encourage people to swap credit cards. The danger with this as a method of reducing your debts is that the temptation to continue using your credit card is strong. If you make the mistake of not closing the credit card you transferred the balance from, you may end up with two credit cards and instead of reducing your debt, you’ll be tempted to increase it further.

The other problem is that after the honeymoon period, the credit card reverts to higher interest rates and if you have not paid off your balance, you will not be better off in the long term. Before you consider this option, check the terms and conditions of the balance transfer. Some of the credit cards count the amount you transfer as a cash withdrawal. While you may save on the interest rate for a few months, if the balance reverts to the normal credit card rate, you’ll pay extra interest at the cash rate. Most credit cards charge a higher rate for cash withdrawals than for purchases.

These credit card offers for low or zero interest on balance transfers only help you to reduce your debt if you can afford to pay off the entire balance during the honeymoon period.

One of the better options for consolidating your debt is to consider a personal loan. If you can offer security for your personal loan, the bank will be able to give you a lower interest rate. Combining two credit cards that have 18 and 19 per cent interest rates into a single personal loan at 12 per cent may certainly save you money on interest, effectively reducing your monthly repayments or your overall debt.

You could save even more if you are able to refinance your mortgage to cover the credit card, store card, and other loan balances. Home loans are cheaper, because the interest rate is much lower, generally around 5 or 6 per cent. Make sure you close the credit or store cards to prevent you spending the credit amount again. Refinancing can put all of your debt into one loan at a low interest rate, so you can afford to make higher monthly payments to pay off the loan faster.

If you are struggling to make the minimum monthly repayments on your various credit cards and loans, you need debt help. While the Reserve Bank of Australia did not raise the official cash rate in March, economists have mixed predictions about the direction the Board will take over the remaining 3 quarters of 2013. Reducing your debt now makes great financial sense, especially if you can lock in a lower interest rate while the rates are low.