If you have high-interest credit card debt and are ready to put together a plan to pay it back, you might be considering one of two popular methods: credit card refinancing vs. debt consolidation.
Both involve paying off your debt with another credit card or loan, ideally at a lower interest rate. Still, the two methods are not the same, and both options require careful consideration. Below, we’ll discuss the pros and cons of each debt payback method, so you can make an informed decision.
Key Points
• Credit card refinancing transfers high-interest debt to a lower-interest card, often with a 0% APR promotional period, to save on interest.
• Debt consolidation combines multiple debts into one loan, simplifying payments and potentially reducing interest.
• Refinancing is ideal for smaller debts that can be paid off quickly, while consolidation suits larger debts needing structured payments.
• Consider credit score, debt amount, and your financial situation when choosing between refinancing and consolidation.
• Refinancing may incur fees and affect credit scores, while consolidation offers fixed payments but may not significantly lower interest.
What Is Credit Card Refinancing?
Credit card refinancing is the process of moving your credit card balance(s) from one card or lender to another with a lower interest rate. The main purpose of refinancing is to reduce the amount of interest you’re paying with a lower rate while you pay off the balance.
A common way to accomplish this is to pay off your existing credit cards with a brand-new balance transfer credit card. This type of card offers a low or 0% interest rate for a promotional period that may last from a few months to 18 months or more.
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Benefits of Credit Card Refinancing
We’ve discussed the goal of credit card refinancing — to lower your interest rate — and how to accomplish it. Now let’s explore some of the benefits (and drawbacks) of refinancing.
Pros of Refinancing
• You may qualify for a promotional 0% APR during your card’s introductory period. If you can pay down your debt during this time, you could potentially get out of debt faster.
• Depending on the interest rate you’re offered, you could save money in interest charges.
• Bill paying may be easier if you decide to refinance multiple credit cards into one new credit card.
• If monthly payments are reasonable, it may be easier to consistently pay them on time. This can help build your credit score.
Cons of Refinancing
• The introductory 0% interest period is short-term, and after it ends, the interest rate can skyrocket to as high as 25%.
• There may be a balance transfer fee of 3%-5%, which can add to your debt.
• 0% interest balance transfer cards often require a good or excellent credit score to qualify.
• Your credit score may temporarily dip a few points when you apply for a new credit card or loan. That’s because the lender will likely run a hard credit check.
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Who Should Consider Credit Card Refinancing?
Credit card refinancing isn’t right for everyone. That said, a balance transfer to a 0% APR card could be a good move if you have a smaller debt to manage or are carrying multiple high-interest debts. Plus, transferring multiple balances into one card can streamline bills.
Refinancing may make sense if you’re looking for better terms on your credit card debt, qualify for a 0% APR, and can pay off the balance before the promotional period ends.
So, as you’re weighing your options, you’ll want to consider a number of factors, including:
• Your credit score and credit history
• How much debt you have
• Your personal finances
What Is Credit Card Debt Consolidation?
Credit card consolidation refers to the process of paying off multiple credit cards or other types of debt with a single loan, referred to as a debt consolidation loan. The main purpose of consolidation is to simplify bills by combining multiple credit card payments into one fixed loan payment.
A borrower may also pay less in interest, but the difference may not be as great as with refinancing. An applicant’s credit score and other financial data points will determine their personal loan interest rate.
There are pros and cons to paying off multiple credit cards with a single short-term loan. Let’s take a look:
Pros of Debt Consolidation
• You can pay off multiple debts with one loan, which can take the guesswork out of bill paying.
• The structured nature of a personal loan means you can make equal payments toward the debt at a fixed rate until it is completely eliminated.
• With most personal loans, you can opt for a fixed interest rate, which ensures payments won’t change over time. (Variable interest rate loans are available, but their lower initial rate can go up as market rates rise.)
Cons of Debt Consolidation
• The terms of a loan will almost always be based on your credit history and holistic financial picture. That means that not every borrower will qualify for a low interest rate or get approved for a personal loan at all.
• You may need to pay fees, including personal loan origination fees.
• You’ll likely need to have good credit in order to qualify for the best interest rate.
Credit Card Refinancing vs Debt Consolidation
To recap, the difference between debt consolidation and credit card refinance is first a matter of goals.
With credit card refinancing — as with other forms of debt refinancing — the aim is to save money by lowering your interest rate. Debt consolidation may or may not save you money on interest, but will certainly simplify bills by replacing multiple credit card obligations with a single monthly payment and a structured payback schedule.
The other difference is that credit card refinancing typically utilizes a balance transfer credit card that has a 0% or low interest rate for a short time. This limits the amount you can transfer to what you can comfortably pay off in a year or so. Debt consolidation utilizes a personal loan, which allows for higher balances to be paid off over a longer payback period.
Which strategy is right for you? That depends on a number of factors, including the amount of debt you have, your current interest rates, and whether you’re able to stick to a structured repayment schedule.
The Takeaway
Credit card refinancing is when a borrower pays off their credit card(s) by moving the balance to another card with a lower interest rate. A popular way to do this is with 0% interest balance transfer credit cards. However, borrowers typically need a high credit score to qualify for these cards. Debt consolidation, on the other hand, is when a borrower simplifies multiple debts by paying them off with a personal loan. Personal loans with a fixed low interest rate and a structured payback schedule are a smart option for consolidating debts.
If you have a relatively small balance that can be paid off in a year or so, refinancing with a balance transfer credit card may be right for you. If you have a larger balance or need more time to fully pay it off, personal loans are available.
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FAQ
Which is better: credit card refinancing or debt consolidation?
There are advantages and drawbacks to both strategies. Credit card refinancing can help you lower your interest rate, which can save you money. Debt consolidation might save you money on interest, but it will definitely simplify bill paying by replacing multiple cards with one monthly bill.
Is refinancing a credit card worth it?
Refinancing a credit card may be worth the effort because it can lower your interest rate, potentially save you money, and make payments more manageable.
Is refinancing the same as consolidation?
Though refinancing and consolidation can both help you manage your debt, they serve different purposes. Refinancing involves moving credit card debt from one card or lender to another, ideally with a lower interest rate. Paying less in interest while you pay off your debt is the main goal of refinancing. When you consolidate, you settle multiple debts with one loan. Simplifying bills into one fixed loan payment is the main reason to consider this strategy.
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