Credit Card Refinancing vs. Debt Consolidation
Updated · Oct 07, 2022
If you can’t handle your debt, there are ways to make your payments more manageable.
By refinancing or consolidating your debt. That way, you’ll pay lower interest, extend the repayment period, or take advantage of an interest-free period.
In this article, we juxtapose credit card refinancing vs. debt consolidation.
Read on to find out how each option works and which one to choose.
Credit Card Refinancing Meaning
Credit card refinancing is taking on a personal loan to repay the amount you owe or transferring your balance to a credit card with lower interest.
Either way, the aim is to save money on interest payments and pay off the balance more quickly.
When refinancing credit card debt, compare offers from multiple lenders to find the best deal possible.
Make sure to read the fine print to ensure you won’t end up paying more in the long run.
What Is Credit Card Refinancing With a Balance Transfer?
The easiest way to avoid interest charges on your credit card is to transfer the balance to a new card. Most banks offer a promotional interest rate for a certain period of time.
If you carry a balance, interest changes accumulate very quickly. On top of that, some issuers also charge high fees for things like late payments or cash advances. As a result, you might end up paying hundreds of dollars a year just in fees and interest.
In this case, you can transfer your balance to a 0% introductory APR card. This will allow you to repay your debt without accruing more interest charges in the meantime.
Just make sure the card has a good APR even after the promotional period expires. Otherwise, you’ll end up paying more in the long term.
What Is Credit Card Refinancing With a Personal Loan?
Alternatively, you can take out a personal loan to pay off the credit card balance.
This is worth it if you have a good score and can qualify for low-interest credit. That way, your monthly payments will be smaller.
But there are a few things to keep in mind when you refinance your credit card debt.
First, your credit score will decrease temporarily. Granted, it’ll bounce back quickly if you pay on time. But you won’t be able to open new accounts for a while.
Second, you will likely be repaying your debt for much longer with a loan than with a credit card.
That’s how installment credit works—the payments and term length are fixed. If you get a loan for ten years, that’s how long it’ll take you to repay it. Changing the terms is not that easy.
With credit cards, on the other hand, payments are flexible. If you make larger payments occasionally, you might pay it off faster.
Debt Consolidation Definition
Debt consolidation is when you take out a new loan to pay off multiple smaller debts.
Even if you can’t get a loan with low interest, it still might be lower than the rates on the individual debts combined.
The difference between debt consolidation and credit card refinance is that the former closes your other accounts.
This makes budgeting much easier. You’ll have only one monthly payment to worry about.
Key Differences Between Debt Consolidation and Credit Card Refinancing
Debt consolidation and credit card refinancing are ways to make your payments more manageable.
Both options involve taking out a new loan, ideally with lower interest, to pay off existing debts.
With debt consolidation, you replace multiple high-interest debts with a single lower-interest loan. So, you get lower interest and more manageable monthly payments.
Credit card debt refinancing, on the other hand, saves you money on interest charges on one account. You replace one high-interest credit with another lower-interest account.
In both cases, your credit score will decrease initially because of the hard credit inquiry. That said, the damage might be bigger with debt consolidation for two reasons.
First, you replace several types of credit with one account. This hurts your credit mix, which accounts for about 10% of your FICO score.
But more importantly, debt consolidation might increase your credit utilization ratio. That’s because you’re taking a large sum from one credit account instead of distributing it between several.
While your score will improve if you make your payments on time, this might take longer with debt consolidation vs. credit card refinancing.
Finally, debt consolidation will extend the time it takes to pay off your debt. It’s easier to avoid that with credit card refinancing.
The Pros and Cons of Credit Card Refinancing
Let’s compare the pros and cons of taking on personal loans to pay off credit card debt vs. transferring your balance.
Both methods will reduce your interest charges and monthly payment.
The main advantages of balance transfers are the following:
- 0% introductory rate
- Repay your debt more quickly than with a loan
- Continue using your credit card without paying interest
The benefits of a personal loan are:
Ultimately, a balance transfer is better if you can pay off the full balance during the promotional period. Just make sure the APR isn’t higher than your current one.
The Pros and Cons of Debt Consolidation
The pros of debt consolidation are the following:
- Lower interest rate
- Smaller monthly payments
- Easier to manage than multiple debts
The drawbacks are:
- You may end up paying more in interest over time because of the longer repayment period
- Your credit score will decrease temporarily
Credit Card Refinancing vs. Debt Consolidation—Which One to Choose?
So, which option is right for you? That depends on your financial situation.
Debt consolidation is the best choice for people with several open credit accounts.
If you want to get out of credit card debt as quickly as possible but don’t want to accumulate more interest charges in the meantime, a balance transfer may be the best option.
Refinancing with a personal loan is the right choice if you have one credit account and can’t afford the monthly payments. This might increase the time you’ll need to repay it, but it’ll be easier to manage.
Whether you choose credit card refinancing or debt consolidation, do your research first.
You can compare offers from multiple lenders. Just don’t apply with more than one financial institution—hard inquiries hurt your credit score.
Credit card refinancing vs. debt consolidation—the choice depends on your needs.
Both options can save you money on interest charges and reduce your monthly payments. But they’re suitable for different purposes.
If you're looking to get out of debt as quickly as possible, credit card refinancing may be the best option.
But if you have several credits, a debt consolidation loan will be more suitable.
Either way, consider all pros and cons before deciding.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.