Credit Card Refinancing vs. Debt Consolidation

For most consumers, there comes a point when paying off debt becomes a priority. It may take place after realizing the high cost of accruing interest on unpaid balances, or when feelings of overwhelm hit trying to manage several payments each month. Regardless of why paying off debt becomes a priority, the good news is that there are several smart ways to go about getting the job done.

Paying off debt is most often accomplished through credit card refinancing or debt consolidation. These two strategies differ from one another in several ways, making it necessary to understand how each works in practice.

Breaking Down Credit Card Refinancing

Credit card refinancing is a general term that describes the process of paying off credit card balances with another form of debt. In most cases, credit card refinancing involves a balance transfer. When refinancing credit card debt with a balance transfer, you use a new or current credit card with a balance transfer offer to pay off a remaining balance on a current, higher interest rate card. Balance transfers are often attractive because they have a zero or low interest rate, making them more cost-effective than standard interest rate cards. You can save a significant amount on interest charges when completing a balance transfer to refinancing credit card debt, but there are considerations to think through.

Weighing the Pros and Cons

Most balance transfers charge a balance transfer fee, ranging from 1 to 5% of the amount you transfer to the new card. Also, balance transfer offers are only set with a low or no interest rate for a short period, usually no longer than 18 months. During this time, no interest accrues on the balance transferred. However, as soon as the period ends, interest is charged and added to the remaining balance that is left unpaid. Because of the short timeframe of balance transfers, refinancing credit card debt with this strategy requires discipline and enough cash flow to make high monthly payments.

The Difference with Debt Consolidation

Debt consolidation is another common strategy used to pay off debt faster and more efficiently, but it differs from credit card refinancing with a balance transfer. With debt consolidation, you take out a fixed-interest loan from a lender and use the lump sum to pay off outstanding debts. This loan structure makes debt consolidation attractive to those who want to pay off multiple debts under a single monthly payment. Additionally, a debt consolidation loan may have a far lower interest rate than other debts, including standard credit cards. As with credit card refinancing, there are a few things to keep in mind.

Understanding Your Options

With debt consolidation, the interest rate offered on a new loan may not be much lower than the current interest rates paid on other debts. It can be difficult to qualify for the lowest possible interest rate, especially if you have credit issues like late payments, collection accounts, or other negative marks on your credit report. Also, debt consolidation loans often have an extended repayment term compared to credit card refinancing. Lenders offer loans with terms ranging from one to seven years, which can make the debt payoff process far longer. However, the longer the repayment term, the lower the monthly payment.

Which is Right for You?

Determining which debt repayment plan works best for you comes down to a few deciding factors. First, if you are confident you can repay the debt in full during a balance transfer period when the interest isn’t accruing, a credit card refinance may be the best choice for you. However, a debt consolidation loan may be a better option if you want a longer period to repay without the concern of additional interest charges in the future.

For both credit card refinancing and a debt consolidation loan, you have one big perk working in your favor. When you pay off a maxed out credit card through either strategy, you are immediately making that credit line available for new purchases. That doesn’t mean you should max it out again. What it does mean is that your credit score is likely to go up quickly. Even though you owe the same amount, you have a lower credit utilization ratio when you take this step. Both credit card refinancing and debt consolidation benefit you in the form of a higher credit score over time because of this.

The Bottom Line

These factors should drive your choice in whether a credit card refinance or a quick debt consolidation loan is the right choice for you. It is also necessary to review the expenses associated with each, including balance transfer fees, loan origination or funding fees, and the interest rate charged on the loan. Be sure to weigh these expenses against the benefits of your debt repayment strategy before making a decision.

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