What happens to your old debts when you consolidate them?

Key points

• A consolidation loan pays out your old debts. It does not automatically close the old accounts, and payout and closure are separate steps.
• Small balances can linger after payout because of accrued interest, pending transactions or subscriptions still billing an old credit card.
• A debt you have cleared can keep appearing in statements, apps and your credit report for a while. Some of that is normal timing, and some needs action.
• Keep written confirmation of every payout and closure. It is the evidence that ends any later dispute.

Our members tell us that while they get a great sense of relief when they get approved after applying with WeMoney, those that need to close their old accounts manually have a final important step to complete. This guide walks through what actually happens to the old debts, in the order it happens, and where the process tends to leak.

Where does the money actually go?

Consolidation replaces several debts with one new loan, and lenders settle the old debts in one of two ways.

Some pay your old creditors directly. You give the lender each account's details and payout figure during the application, and at settlement the funds go straight to the credit card issuer, the personal loan provider or the buy now pay later account. Members who chose a lender that paid old debts out for them valued this version for a plain reason: it removes the follow-through that tends to slip once the urgency has passed, because direct payout does the work of closing the accounts for you.

Others deposit the loan into your account, and paying out each old debt is your job. Nothing is wrong with this version, but the discipline it demands is worth flagging. The full amount needs to reach the old debts promptly, because every week the money sits in a transaction account is a week you are paying interest on the new loan while the old balances keep accruing their own interest. If the funds go to you first, treat the payouts as your top priority so you're not left with having to pay more interest.

Either way, ask each old provider for a payout figure rather than paying the balance you remember. A payout figure usually includes interest accrued to the discharge date and any early-exit fees (remember the interest often accrues daily). Paying yesterday's number is how accounts end up two dollars short of closed, and never get shut down.

Why is there still a balance on the old account?

The most common post-settlement surprise is an old account that refuses to go down to zero. Members described chasing final amounts that seemed to regenerate, and most of the causes are mundane but painful.

Interest keeps accruing until the day the payout lands, so an amount quoted last week is slightly wrong this week. Credit cards add extra complexity: a purchase made before settlement can still be pending, and any subscriptions billed to the credit card, streaming, insurance, app stores, will keep arriving until each one is moved to another payment method. A $9,000 payout can become a $34 balance a fortnight later without any mistakes, with all the potential of a black mark if you default on repayment.

The reverse also happens. Pay slightly more than the final figure and the account shows a credit balance, which the provider should refund on request once the account is closed. Small residual and credit balances are not disasters, they only become problems when nobody is watching the account because it is mentally already finished.

Closing the account properly

Payout gets the balance to zero. Closure is a separate instruction, and with credit cards and Afterpay or Zip Pay accounts, it usually has to come from you unless the new lender required closure as a condition of the loan.

Before closing a credit card, move anything that automatically bills or debits it. Then ask the provider to close the account and to confirm the closure in writing – keep that confirmation with your payout records. If a provider makes closure difficult, persist in writing, and remember that unresolved complaints about credit providers can go to the Australian Financial Complaints Authority for free. Members told us about closure being obstructed by residual amounts and unexplained extra charges, which is hassle nobody needs, especially when you're trying to move on.

Whether to close every paid-out account is a genuine decision rather than a rule. Closing removes the limit and potential to use that credit to build up future debt. What matters at this stage is that any account you intend to close actually gets closed, and any credit you deliberately keep is a choice you made rather than an account you forgot.

Why can a closed debt still show up?

Even after payout and closure, old debts can have an afterlife – knowing which parts are normal saves worry.

Statements can arrive for one more cycle, often showing the payout landing and a zero balance. Your credit report updates on the providers' reporting schedule rather than instantly, so a closed account can appear open for a while before it shows as closed. Once updated, the account does not vanish: consumer credit account information stays on your report for around two years after the account ends, and the enquiry from the consolidation application itself remains for five. The OAIC's guide to what stays on a credit report sets out the retention periods. A closed account with a clean payout is not hurting you by being visible. It is simply history.

WeMoney allows you to see your accounts and credit score whenever you open the app, so you'll see connected accounts disappear when they've been closed, and you'll see your credit score as it changes. It makes it really easy to spot accounts that were supposed to be closed lingering a few weeks later, and any that have a balance when they shouldn't is something you should definitely follow up.

A payout confirmation checklist

Below is a simple checklist to follow a week or two after settlement, to make sure the process is totally finished:

• Obtained a dated payout figure for every debt before settlement
• Confirmed each payout landed and each old account reads zero
• Checked old credit cards for pending transactions and residual interest
• Moved every subscription and direct debit off paid-out accounts
• Requested closure of each account you intend to close, in writing
• Received written closure confirmation and filed it with the payout records
• Claimed refunds of any credit balances
• Diarised a one-month check of statements, your app view and your credit report

If you are reading this while still deciding whether to consolidate, use WeMoney to look through your accounts, find subscriptions you need to shift, and direct debits you need to update so you're best prepared. Then when you're ready you can get personalised consolidation offers, and an approval score to give you the confidence before applying.

The only thing to do after seeing your old debt balances drop to zero once they've been paid out, is to figure out what the freed-up repayment room should do next for you.

Sources

• OAIC: What stays on a credit report?
• Moneysmart: Debt consolidation and refinancing

This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.