Credit Card Refinancing vs. Debt Consolidation: Which is Right for You?

credit card refinancing vs. debt consolidation

When it comes to debt relief, you may be overwhelmed by your options. And often, many sound similar, leaving you wondering which path is right for you.

A common decision is comparing credit card refinancing vs. debt consolidation. Understanding the differences between them, as well as the pros and cons of each, can help you determine the best solution for your debt situation.

Credit Card Refinancing vs. Debt Consolidation: What’s the Same?

Credit card refinancing and debt consolidation do share many similarities. The general purpose for pursuing either of these options is generally the same – you’re looking to simplify your debt into one payment, hopefully with a lower interest rate. To lock in that lower rate, however, both options require a good credit score. And in both cases, you’ll want to pay off your new debt in a timely manner and without taking on additional debt. But the benefit of having one simplified payment with either of these options is that you’re less likely to miss a due date.

Credit Card Refinancing: Pros

Credit card refinancing involves transferring your credit card balances to a new card. Generally, you would make this transfer onto a card with an introductory zero-interest period. Credit cards may offer this grace period from 12 to 18 months. One of your current creditors may even offer a balance transfer card with this zero-interest period as a promotion.

Moving your balances to a 0% card can save you a great deal in interest. This will especially be the case if you have several accounts with high balances. If you have a good credit score, you’re likely to be approved for a higher credit limit on the balance transfer card. This increases the amount you’ll be able to transfer over and pay down interest free. It will also simplify your payment because now you’ll just have to make payments to the balance transfer card. With an interest-free balance transfer card, you can focus solely on paying down the principal.

Credit Card Refinancing: Cons

When it comes to determining whether to pursue credit card refinancing or debt consolidation, your credit score will play a major role in both options. Generally, creditors look for a credit score of 680 or better to qualify for a 0% balance transfer card. If you don’t meet that criteria, you may need to pursue options other than credit card refinancing or shop around for cards that will at least lower your average interest rate.

Additionally, a fee is usually involved when transferring your balances. It often ranges from 3% to 5% of the balances you’re transferring. Be sure to know the total cost of transferring before making your decision.

Credit card refinancing is only effective if you’re able to pay off your entire balance during the interest-free period. Additionally, because the card is interest-free, it can be tempting to add to the balance. However, this would essentially defeat the purpose of refinancing.

Also, applying for a balance-transfer card will be a hard inquiry on your credit report. This can have a small negative impact on your credit score. However, if you’re able to successfully pay down your balance, the reduction of your utilization rate will improve your credit.

Debt Consolidation: Pros

Debt consolidation is the moving of debts into a consolidation loan. This can be a secured loan, such as a home equity loan, or an unsecured loan, such as a personal loan. Because they require collateral, secured loans are generally easier to qualify for if you have good credit and a steady income. Personal loans are harder to obtain and may come with higher interest rates. However, the rates are generally still favorable to credit card interest rates.

The most significant advantages of debt consolidation are the lower, fixed interest rates and the extended payment periods. With secured loans, interest rates can be as low as 5-8%, while credit card interest rates may range from 20-25%. Personal loan rates vary based on your credit. Additionally, loans allow you to pay both the principal and the interest when you make your monthly payments. You will know the minimum payment you’ll be expected to pay and how long it will take you to pay off the loan. Loan terms are generally around five years. If you have additional income, you can often pay off the loan before the end of the loan term.

And like with credit card refinancing, with debt consolidation, you will simplify to one monthly payment. This can help you avoid missing due dates.

Debt Consolidation: Cons

When it comes to credit card refinancing vs. debt consolidation, one of the biggest differentiators is the risk involved. If you’re consolidating with a home equity loan or line of credit (HELOC), you’re putting your home on the line. Therefore, if you’re unable to make your payments, your home could subject to foreclosure.

Unsecured loans like personal loans are a safer bet, but may cost you more. The interest rates are generally higher than secured loans and they may come with a hefty origination fee – generally around 8% of the amount you’re borrowing. However, both of these figures are determined by your credit. Personal loans also often take a long time to process.

Like with credit card refinancing, taking on any additional debt while paying off a debt consolidation loan will hinder your financial progress.

Credit Card Refinancing vs. Debt Consolidation: Which Should You Choose?

The decision of credit card refinancing vs. debt consolidation will be based on your situation. What works best for you may not be the best choice for someone else. However, the biggest questions to consider are how much debt you have and how quickly you’ll be able to pay it off. If you believe you would be able to pay it off in full in the 12-18 months a balance transfer card would be interest free, then credit card refinancing could be an effective, low-risk option for you. However, if you feel as though you would be unable to pay off your balances that quickly, you may consider debt consolidation. While it can be the costlier or higher risk option, debt consolidation also allows for some peace of mind in knowing that your payment will be the same amount for a predetermined length of time.

If you’re struggling with debt and don’t know where to turn, the experienced professionals at Tayne Law Group, P.C. are here to help. We can help you find the best option for you and your situation.

Call us for a free consultation at 866-890-7337 or fill out our short contact form and we’ll get in touch!

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