If you’re struggling to pay off your debt, credit card refinancing and debt consolidation could help. Both solutions allow you to simplify your finances and reduce your interest, ensuring that more of your hard-earned money is going to your principal balance.
These two debt management options have some key similarities, and in some cases, you can do both at the same time. However, each one is ideal for a specific situation. Read on to learn more about how credit card refinancing and debt consolidation work and how to decide which is right for you.
What is Credit Card Refinancing?
Credit card refinancing is taking out a new loan or credit card to refinance your existing credit card balance at a lower interest rate. Credit cards have notoriously high interest rates, making them difficult to pay off. Refinancing your high-interest credit card debt allows you to pay it down more quickly and reduce your overall costs.
How Does Credit Card Refinancing Work?
When you refinancing your credit card debt, you can generally do so in one of two different ways:
- Balance transfer: When you do a balance transfer, you move your credit card balance to a new card, ideally with a lower interest rate. Many card issuers offer 0% introductory APRs on balance transfers for anywhere from six months to two years. With a 0% APR, your entire monthly payment goes toward your principal balance. Even if you don’t qualify for a 0% APR, a lower rate can help you repay your debt faster — just make sure the amount you’ll save is lower than any balance transfer fees.
- Personal loan: The other way you can refinance your credit card is to take out a personal loan to pay off your card balances. Debt consolidation loans often have much lower interest rates than credit cards, which will help lower your interest payments. This option may be ideal if you don’t qualify for a 0% APR credit card or have a large amount of credit card debt to refinance.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts into one. You can use debt consolidation for any type of unsecured debt — usually unsecured debt — including credit cards, personal loans, or medical bills.
Debt consolidation allows you to simplify your debt situation because you’re going from several debts to one. That also means keeping track of just a single monthly payment and interest rate. Additionally, debt consolidation can help you save money, especially if you’re consolidating high-interest debt like credit cards.
How Does Debt Consolidation Work?
When you consolidate debt, you take out one new debt — usually a personal loan — and use it to pay off your other debts.
For example, suppose you have three different credit cards. You could take out a personal loan that’s large enough to pay off each card. Now, instead of making three different monthly credit card payments, you make just one personal loan payment.
As you can see, this method allows you to consolidate and refinance your credit card debt. You consolidate by replacing multiple existing debts with one, and you refinance by getting a (hopefully) lower interest rate.
Pros and Cons of Credit Card Refinancing
Credit card refinancing has several key benefits, but there are also some disadvantages.
Advantages of Credit Card Refinancing
- Potential 0% APR: Depending on your eligibility, you may qualify for a 0% APR credit card that helps you pay off your card more quickly.
- Reduced interest: Credit card refinancing can help you reduce your interest or even avoid interest altogether, especially if you qualify for a 0% APR credit card.
- Lower monthly payment: When you refinance your credit card, you can lower your monthly payment, freeing up room in your budget for other expenses.
Disadvantages of Credit Card Refinancing
- 0% APR requires good credit: Though a 0% APR credit card is often the most cost-effective form of credit card refinancing, it may require good or excellent credit.
- May come with fees: Credit card refinancing may come with fees, including balance transfer fees or loan origination fees.
- Requires a sufficient credit limit: If you’re considering a balance transfer, you’ll need to qualify for a credit limit high enough to transfer your balance, which isn’t a guarantee.
Pros and Cons of Debt Consolidation
Debt consolidation also has pros and cons, some of which are the same as the pros and cons of credit card refinancing.
Advantages of Debt Consolidation
- Combines multiple debts: Debt consolidation allows you to combine multiple debts into one, which helps simplify your finances. If you deal with financial stress, this can help reduce it.
- Reduced interest: Debt consolidation can help you qualify for a low interest rate. This can lower your monthly and long-term interest charges.
- Fixed interest rate: Personal loans have fixed interest rates, so you don’t have to worry about rate increases. And if you’re consolidating credit card debt with a personal loan, you’ll move from compound interest to simple interest, which will also save you money.
Disadvantages of Debt Consolidation
- May come with fees: Like credit card refinancing, debt consolidation may require fees, including personal loan origination fees.
- Best for borrowers with good credit: You’ll have the most success with debt consolidation with good credit since that will help you qualify for the best interest rate. If you have bad credit, you could pay even more interest than you are now.
- Could extend payoff for some debts: If you have any small debts that you could pay off quickly, debt consolidation could actually extend the payoff time.
Comparing Credit Card Refinancing and Debt Consolidation
Credit card refinancing and debt consolidation have some key similarities and differences. Let’s compare a few of the most important features.
Interest Rates and Total Cost
You can refinance credit card debt with either a balance transfer credit card or a personal loan, while you would usually consolidate debt with a personal loan.
If you qualify for a 0% APR credit card to refinance your debt, you could avoid paying interest during the introductory rate period. And if you pay off the entire balance during the 0% promotional period, you can avoid interest altogether. However, you’ll still likely pay a balance transfer fee.
On the other hand, a personal loan for credit card refinancing or debt consolidation will usually require interest from the start. However, it’s likely to be lower than your credit card interest rate. You will also likely pay a loan origination fee. Some lenders waive this fee but usually require good credit to qualify.
Payment Terms
Payment terms for balance transfer cards and personal loans differ significantly.
First, a credit card balance transfer card doesn’t have fixed payments or a set payoff date like a personal loan. Instead, your minimum payments are usually based on a percentage of your card balance plus interest. Additionally, if your balance transfer card charges interest or your 0% rate has expired, you’ll pay compound interest, meaning your interest is added to your balance daily and accrues interest.
On the other hand, a personal loan has a fixed interest rate and fixed monthly payments. This structure provides stability in your budget since you always know how much you’ll pay and your interest rate. Personal loans also have set repayment terms, meaning you know exactly when you’ll become debt-free.
Impact on Credit Score
Credit card financing and debt consolidation can positively and negatively impact your credit score. First, each choice requires a hard inquiry on your credit report and requires you to open a new debt account. Both of these can reduce your credit score — likely a minimal, temporary impact.
However, both options can also improve your credit. First, you will free up room in your credit card limit, which improves your credit utilization. If you’re refinancing your credit card debt by opening a new credit card, the addition to your credit limit can also help boost your credit score. Finally, refinancing and debt consolidation can improve your payment history, assuming you make all your payments on time.
Keep in mind that both options could also harm your credit if you use them irresponsibly. For example, if you miss payments on your new debt or run up another credit card balance, your score could decline.
Choosing Between Credit Card Refinancing and Debt Consolidation
Credit card refinancing and debt consolidation are both best suited to specific situations. And because there’s some crossover between the two, you could refinance and consolidate your credit card debt in one fell swoop. Here’s what to consider when deciding which is right for you.
Assess Your Financial Situation
It’s important to have a firm grasp of your financial situation before applying for new credit cards or loans. First, take inventory of your debts, noting the different types, payment terms, and interest rates. Identifying the type and amount of debt you have is the best starting point to determine whether credit card refinancing your debt consolidation is the right choice.
Research and Compare Options
Once you know what type of debt you want to pay off, you can narrow your options. If you have only credit card debt, refinancing and/or consolidating debt with a balance transfer or a personal loan is an option. If you have multiple types of debts, then a personal loan is likely the right choice.
It’s worth exploring several different credit card and personal loan options to find the best offer. Consider the 0% introductory offer length (in the case of a balance transfer card), interest rates, repayment terms, fees, and other factors. If you’re using a personal loan, you can even pre-qualify for several options to see which offers the best rate.
Apply for the Best Option
You can complete your new debt application once you’ve chosen the best option. Whether you’re using a balance transfer card or a personal loan, you can apply online. You may qualify immediately if you have good credit, though it could also take a few days.
Once your application is approved, you can move forward with paying off your existing debts with your new credit card or loan. To ensure you don’t miss any payments, keep making payments on your existing debts until you’re sure the transfer has gone through.
Conclusion
Both credit card refinancing and debt consolidation can help you simplify your finances and pay off your debt more quickly. Each option has pros and cons, and though they have some similarities, each is best suited to a specific situation.
Of course, neither credit card refinancing nor debt consolidation will get to the root of your financial issues. It’s important to also address what got you into debt in the first place, whether it’s a budget shortfall or a spending issue. Otherwise, you’re likely to find yourself in debt again.
Additionally, credit card refinancing and debt consolidation can be useful, but they aren’t right for every situation. If your debt has become unmanageable and neither of those solutions will fix your problem, you may want to consider debt settlement or alternatives to bankruptcy.
Tayne Law Group is a trusted resource if you need help with your debt. Our experienced debt help lawyers can help you find the best solution to get out from under the financial and emotional stress of your debt. To get started, call us for a free no obligation phone consultation with an experienced debt help team member at (866) 890-7337 or complete our short contact form to start your free consultation and find out if debt relief is right for you. We never share or sell your information.
