Credit Card Refinancing vs. Debt Consolidation
In a study from November 2022, 46% of cardholders noted that their credit card debt was so high it would take them at least a year to pay it off. Do you fall into that category? Are you also overwhelmed by high interest rates and massive credit card debt?
Thankfully, taking steps to reduce your payments is easier than it may seem. A few popular ways to tackle excess credit card debt include credit card refinancing and debt consolidation.
Follow along as we explore the pros and cons of each option so you can make an informed decision on which is most suitable for your financial situation. By the end of this guide, you’ll learn more about how these strategies can help you save money and get out of the burden of mounting debt.
What Is Credit Card Refinancing?
Credit card refinancing works by consolidating credit cards from multiple companies into one of the lower-interest credit cards owned by the same company.
Ideally, you’d find a credit card with a zero-interest balance transfer offer, typically lasting 12 to 18 months. This credit card usually has a high credit limit for transferring existing credit card debt from the old high-interest cards.
This allows you to pay a single credit card bill with a lower payment, making it much easier to manage credit card debt. By combining all your payments into one monthly bill, you also benefit from the 0% APR and other perks like rewards or points.
All in all, this allows you to enjoy one monthly payment and gives you some breathing room as you benefit from the 0% interest rate. Most people take this time to save money to pay off large sums of that debt.
We know what you might be thinking. “Can I still use my credit card after debt consolidation?” Your old credit cards will no longer be valid. However, as long as you haven’t reached your credit limit on the new balance transfer card, you can still use it to finance purchases.
What Is Debt Consolidation?
Credit card debt consolidation is another way to manage credit card debt and help bring financial stability.
It involves taking out a loan from a credit union, bank, or another lending provider to pay off credit cards, usually at a lower interest rate. This allows individuals to pay down credit card debt more quickly and easily manage their finances.
In essence, credit card debt consolidation works similarly to credit card refinancing with a balance transfer card in that it allows you to make just one payment a month, making it much simpler for you to get out of credit card debt faster.
With credit card debt consolidation, consolidating credit cards into one loan can also give you access to more competitive interest rates, translating into less money paid over the life of the loan.
Credit Card Refinancing vs. Debt Consolidation
So, what’s the best way to consolidate credit card debt? When it comes to credit card refinancing vs. debt consolidation, they’re obviously quite similar. Both involve consolidating credit card debt, just through different vehicles.
A balance-transfer credit card allows you to move existing balances and high-interest rates onto a single card with a lower interest rate. This makes it easier to consolidate payments and pay off debt faster.
Do note that there are often balance transfer fees associated with credit card refinancing. This is usually about 3% to 5% of your total balance. So, you’d need to look at the APR (both the introductory offer and the regular APR after that offer expires) to ensure it’s worth the consolidation.
On the other hand, if you have multiple debts, using loans to consolidate debt may be the better option because it combines all debts into a single loan at one monthly payment and often offers lower interest rates than an individual would qualify for on their own.
Ultimately, the choice depends on your situation since both methods are effective ways to help manage your finances and consolidate credit card debt.
Refinancing vs. Debt Consolidation: Pros & Cons
Deciding how to consolidate credit card debt can be a challenge. To help you make the right decision, it pays to look at the pros and cons of each option.
Pros & Cons of Credit Card Refinancing
On the plus side, balance transfer cards tend to come with the following:
- Low introductory rates
- Longer balance transfer periods
This means your balance could still be paid off while you pay less or no interest. Additionally, consolidating all your debts into one balance will make managing them easier since you will only have one payment instead of multiple payments to different creditors monthly.
However, balance transfer credit cards as part of credit card refinancing do have drawbacks, including:
- Balance transfer fees
- Higher APRs after the introductory period
- A hard inquiry on your credit check
Namely, this hard inquiry is something you’ll want to think twice about. If you’re going to apply for a balance transfer card, ensure the hard inquiry is worth it. It will temporarily lower your credit score, but it could be worth it in the long run if the card helps you pay off your debt.
Pros & Cons of Debt Consolidation Loans
On the plus side, debt consolidation loans:
- Make debt easier to manage by combining debt into one payment that is typically lower than what was previously owed.
- There are also debt relief options like loan forgiveness or debt repayment plans that can be available.
On the other hand, debt consolidation loans may not completely get rid of debt. Depending on interest rates on the loan and other factors, paying the loan off could take many years.
Additionally, taking out another type of loan could put you in an even more precarious financial situation due to additional debt accrued through high interest rates.
Should You Consolidate Credit Card Debt?
Yes. If you have a lot of credit card debt, it can be a good idea. Consolidating your credit card debt can be a great way to save money in the long run. Not only can you benefit from a lower interest rate and monthly payments, but you might also be able to consolidate all of your debt into one payment, which is much more manageable.
The key is to make sure that you are making the best decision for your circumstances. It's important to consider the pros and cons of consolidating, and don't forget about the hidden fees that sometimes pop up when consolidating debt.
What’s the best way to consolidate credit card debt should you decide to consolidate it? It depends, honestly. Both methods can be effective. Ultimately, we suggest comparing the interest rates of each option. Calculate what you’d end up paying over the lifetime of the loan or credit card and consider how each will impact your credit score.
Boost Credit With Cheese
If credit card debt has caused your credit score to suffer, consolidating it is worth considering. However, boosting your credit score in the meantime can help you prevent credit card application denial. The Cheese credit building app makes credit building easy and hassle-free.
With a credit builder loan that doesn't even require a hard credit check, each payment you make will be reported to the three credit bureaus and added to your savings. As time passes, it will help build up a positive credit history, and you'll get your money back when the loan is paid off!
Check out the Cheese credit-building app now. It could be just the tool you need to start improving your standing with lenders.