Are you drowning in credit card debt? If you’re struggling to make the minimum monthly payments and cover all your other financial obligations, you could find relief through credit card refinancing or debt consolidation.
Both have the same core objective: minimize the interest you pay on credit card debt and eliminate the balances faster. Still, they aren’t quite the same.
This guide explores the differences between the two and a few alternatives worth considering if refinancing or debt consolidation don’t quite work for you, like a debt management plan or talking to a free credit advisor.
What is Credit Card Refinancing?
Credit card refinancing entails getting a balance transfer credit card with a promotional interest rate and moving the balances from high-interest credit cards to the new one. To illustrate, if you have three cards that charge 19.9, 18.9 and 16.9 percent in interest and you get approved for a card that only charges 10.9 percent in interest, it would be sensible to move the balances over (assuming the credit line is big enough).
Generally, these cards come with an interest-free period between 12 and 24 months, but you’ll pay a balance transfer fee.
Ideally, you want to pay off the balance on the new card before the promotional interest period ends for this approach to make sense. (If the card doesn’t have an interest-free window, it should only be used for credit card refinancing if its interest rate is significantly lower).
It’s equally important to stow away the cards you paid off so your plan won’t backfire.
Pros of Credit Card Refinancing
- You could get approved in minutes. Credit card applications are easy to complete, and you’ll usually get an answer right away.
- You could avoid paying excessive interest. The credit card issuer won’t charge interest during the promotional period when you transfer the balances over.
- You’ll only make one payment each month. Instead of scheduling multiple payments, you’ll only make one payment each month.
- You could get out of debt faster. If you’re able to repay what you owe within the zero-interest period, you’ll shave several years off the repayment period.
Cons of Credit Card Refinancing
- You may not get approved with a low credit score. You’ll need a good or excellent credit score to qualify for a balance transfer card with a competitive interest rate.
- You may be subject to a balance transfer fee. Most credit card companies charge a fee between three and five percent of the amount you transfer over to the new card.
- You could increase your debt load. If you continue to use the credit cards you pay off or fail to pay off the new card before the promotional interest period expires, you could end up with more debt than you started with.
- Your interest rate will fluctuate. Credit cards usually come with a variable interest rate, which will fluctuate over time.
What is Debt Consolidation
To consolidate your credit card debt, you’ll take out a personal loan – generally one with a lower interest rate than you currently have on your credit cards. You’ll use the loan proceeds to pay your balances in full and make the required installment payments over the loan term.
Like credit card refinancing, this method is only effective if you avoid using your credit cards once you pay them off. Otherwise, you could find yourself buried in even more debt than you started with.
Before taking out a personal loan to consolidate credit card debt, carefully weigh the benefits and drawbacks.
Pros of Debt Consolidation
- You will streamline the repayment process. Instead of paying multiple credit card companies each month, you’ll only make a single payment to the lender.
- You could save a fortune in interest. If you can get a low interest rate, chances are you’ll save hundreds or thousands of dollars in interest with a debt consolidation loan. This is especially true if you get a short repayment period (although your monthly payment could be a bit higher).
- You could get a lower monthly payment. You may have the option to extend your loan term to lower your monthly payment. While it could give your budget a break, the downside is you’ll potentially pay more in interest over the life of the loan.
Cons of Debt Consolidation
- You’ll likely need good credit to qualify. The most competitive interest rates are typically reserved for borrowers with good or excellent credit scores. If your credit score is low, a debt consolidation loan may not be worthwhile as the interest rate could be on the high end.
- You risk incurring more debt. As mentioned above, you could rack up more debt if you’re not disciplined enough to refrain from using the credit cards you pay off with the loan proceeds.
- You could pay origination fees. Some lenders charge between one and three percent of the loan amount in origination fees. You won’t have to pay this amount upfront, but it’ll be rolled into the loan and make your monthly payments slightly higher.
- You may not get a decision right away. Most lenders let you prequalify for a loan directly on the website. Still, you may have to submit income documentation to get final approval.
How To Choose Between Credit Card Refinancing and Debt Consolidation?
If your goal is to pay off your credit card balances as quickly as possible, a debt consolidation loan could be a good fit. But if your primary objective is to reduce the interest rate on your credit cards, credit card refinancing may be more appropriate. Or else, you can explore other debt relief programs that may be more suitable for you.
Get Help From A Credit Counselor
Perhaps credit card refinancing or debt consolidation don’t quite work for you? In that case, try reaching out to a credit counselor to learn more about other options that could help you find relief from your mounting credit card debt.
Debt Management Programs
Your credit counselor may suggest a debt management program (DMP). They’re offered through firms that can negotiate concessions with your creditors and develop a payment plan that makes it easier to eliminate your credit card balances.
Debt Settlement Options
As a last resort, you can consult with a debt settlement company, although consider the difference between debt management and debt settlement first. They can assist you with reaching settlements with your creditors for a fraction of what you owe. You could resolve your debts in two to four years, but there will likely be severe consequences for your credit.
