Credit card debt is relatively easy to get into – paying it off is another story. So, if you’re buried in credit card debt, chances are you’re overwhelmed by the minimum payments and desperately seek relief.
Credit card refinancing and debt consolidation are common solutions consumers use to get rid of those pesky balances. But which is best? Read on to learn more about how they work, the benefits and drawbacks of each, and where to find help if you’re struggling to stay afloat financially due to credit card debt.
Credit Card Refinancing vs. Debt Consolidation: Key Differences
Both have the same objective – to help consumers get out of credit card debt faster and save on interest. However, the critical difference between the two is how it’s done.
Credit card refinancing is done with a balance transfer card. Debt consolidation usually involves taking out a loan to pay off your high-interest credit cards.
What is Credit Card Refinancing?
If you have good or excellent credit, you can temporarily secure a lower interest rate by applying for a balance transfer credit card. Here’s how it works:
- Open a balance transfer card that offers a zero-interest promotional period.
- Transfer the balances from your high-interest credit cards to the new card.
- Pay off the balance on the new card within the promotional period (generally between 12 and 18 months). Also, refrain from using the card you pay off.
Pros of Credit Card Refinancing
- You could save hundreds or thousands of dollars in interest.
- You can get out of credit card debt faster if the limit on the new card is large enough to cover all your high-interest credit card debt.
- Balance transfer credit cards are typically approved in minutes.
Cons of Credit Card Refinancing
- You’ll likely pay a balance transfer fee between three and five percent.
- You could end up with even more debt if you pay off your high-interest credit cards and use them again.
- You must have the means to pay off the balance on the new card within the promotional period for this strategy to be effective.
- You could get denied a balance transfer credit card with less than perfect credit.
- You could lose the promotional interest rate and get a steep penalty APR if you miss a payment.
When to Refinance Credit Card Debt
It may be ideal to refinance your credit card debt if you can afford to pay the total outstanding balance on the new credit card within the promotional period. But make sure you can qualify for a balance transfer card with a limit that’s large enough to cover all the outstanding balances on your high-interest credit cards.
You’ll need to devise a plan of action to ensure you can pull it off, or you risk paying interest if the interest-free period ends and you still have a balance.
What is Debt Consolidation?
Debt consolidation entails securing a low-interest personal or home equity loan to eliminate your credit card debt. Most lenders require a steady, verifiable source of income and good or excellent credit.
Home equity loans are secured by your property. The amount you’re eligible to borrow will depend on the current market value of your home and how much you currently owe. By contrast, personal loans are unsecured, but you can expect a higher interest rate as they’re riskier to lenders.
Pros of Debt Consolidation
- If you apply for a personal loan with an online lender, you could receive a response in minutes.
- You’ll make a single payment to the lender instead of several monthly payments to credit card issuers.
- You could save a bundle in interest with a personal loan and pay off the balances faster.
Cons of Debt Consolidation
- You could pay hefty fees for home equity and personal loans.
- You could get a higher interest rate on a loan if you don’t have good or excellent credit.
- It could take some time to receive a response from the lender regarding a home equity loan application.
- You could lose your home if you default on a home equity loan.
- You could struggle to afford the payments on a personal loan as the repayment period is usually three to five years.
When to Take a Debt Consolidation Loan
Can’t afford to repay your credit card debt in a short period, even if it’s moved to a balance transfer card? Or maybe you have good or excellent credit and can afford the loan payments? Either way, a debt consolidation loan could be a good fit. A personal loan will get you out of debt sooner as the repayment period is shorter, but you’ll also pay more each month.
On the other hand, a home equity loan gives you a better rate and extended loan term. Still, the downside is you’ll pay more in interest as the lender has several years to collect from you.
