Credit card refinancing vs debt consolidation

By Izzy M
Modified on June 7, 2023
credit card refinancing vs debt consolidation

Credit cards are a convenient financial tool, but many people get stuck with bad credit card offers. Tackling credit card debt can help you become financially independent! But it can be hard to pay off credit card companies when your interest rates are too high. You can refinance or consolidate if you need help managing your credit card debt! 

What Is Credit Card Refinancing?

If your repayment terms are not ideal for your financial situation, you can change them! Credit card refinancing is the act of replacing an existing credit card with another to obtain different repayment terms, such as a lower APR rate. 

Borrowers can refinance with the same credit card issuer or a different one. You can first attempt to negotiate with your current credit card provider to get better repayment terms or go ahead and apply for a new credit card. Credit card companies have different eligibility requirements, but creditors will focus on your credit score, income, and existing debt. 

Benefits of Credit Card Refinancing

Refinancing a credit card can significantly benefit borrowers. You could get lower monthly payments, fixed interest rates, and a faster repayment plan through credit card refinancing. 

Lower Monthly Payments

Suppose you applied for a credit card with a thin credit file or a low credit score. You may have received a subpar interest rate offer that stuck you with a high monthly payment. Credit card refinancing could help you get a lower interest rate, making monthly payments more affordable!

Fixed Interest Rates

Many credit cards have variable interest rates that fluctuate over time. Monthly payments change with variable interest rates, making it hard to adhere to a budget plan. Credit card refinancing with a new company could help you get fixed monthly payments for a predictable payment schedule. Knowing how much money to keep in your checking account can help you avoid an overdrawn bank account.  

Fast Repayment Plan

You could have a faster repayment plan when you refinance credit card debt! Lower interest rates can help you save more money. You can use that extra income to pay off credit card debt quickly. Paying off existing debt gives you the financial freedom to do whatever you want since you have fewer payment obligations. 

What Is Debt Consolidation?

Debt consolidation is when a borrower uses a substantial loan or credit line to pay off multiple debts instead of worrying about paying multiple credit card debts. Credit card debt consolidation can help borrowers keep track of monthly expenses and save money. 

Borrowers can use almost any sizable installment loan as a debt consolidation loan. Qualification for debt consolidation loans depends on your credit score, monthly income, and payment history. 

Benefits of Credit Card Debt Consolidation

Credit card debt consolidation can help borrowers regain control of their finances and save money. If you consolidate debt, you can have fewer monthly bills, lower interest rates, and extended repayment terms! 

Fewer Monthly Payments

Do you have multiple credit cards with varying interest rates and minimum payments? Debt consolidation allows you to merge various credit card balances, so you have one monthly payment! Having fewer due dates to remember can make it easier to avoid missed payments. Missing even one payment can severely damage your credit score. Simplifying your expenses can help you improve your payment history over time! 

Lower Interest Rates

Debt consolidation can help you get a lower interest rate to save money! If your credit cards have high rates, you can replace all your credit accounts with one low-interest loan. A low-rate single loan can decrease your monthly expenses! Smaller monthly payments can make it easier to save money on a low income for vacations, retirement, etc. 

Clear Repayment Terms

Consolidating debt is an effective personal finance strategy. Replacing your Credit card debt with a consolidation loan can help you get a clear repayment plan that lasts a few months or years. Your loan agreement will specify the monthly payment amount, how many months you need to pay, and your final payment date. On the other hand, it can take longer to pay off credit cards if you only make minimum payments. 

What Is the Best Debt Consolidation Loan?

The best loan to consolidate your credit card debt depends on your debt, credit score, and repayment preferences. There are several financial options for debt consolidation, such as personal loans, balance transfer credit cards, and home equity loans. 

Personal Loans

A personal loan is an installment loan that provides a lump sum quickly. Personal loans have extensive loan ranges and repayment lengths. If you have a few thousand dollars in credit card debt, you may be able to consolidate it with one personal loan. The interest rates with personal loans are generally decent and lower than credit cards so that you can obtain lower monthly payments.  

Potential borrowers typically need a good credit score and a steady income. However, there are loans for people with bad credit! You may still qualify for a debt consolidation loan with poor credit if you provide proof of repayment. 

Balance Transfer Credit Card

A balance transfer is a credit card transaction that involves moving debt from one credit account to another. Balance transfer cards are convenient because you can add all your credit card debt to one account. Some credit card companies offer a zero interest introductory APR period but pay close attention to the rate after the promotional period. Often the interest rate after the first few months is very high. 

Credit card balance transfers are convenient, but they will incur fees. The credit card issuer will charge balance transfer fees based on a percentage of the debt amount. Suppose you have multiple credit accounts and high credit card balances. In that case, you should expect to pay a hefty balance transfer fee. 

Home Equity Loans

A Home equity loan is a secured loan option for homeowners. You could get a sizeable loan to consolidate credit card debt by using your home as collateral. To qualify for a home equity loan, your home must have equity. In addition, you must have a decent credit score and proof of income.

Secured loans are risky because if you fall behind on payments, you could lose possession of your personal property. However, secured loans lower the lending risk for lenders. You could get better loan terms with a bad credit score by using collateral. If you apply for a home equity loan and then change your mind, know that many lenders adhere to the three-day cancellation rule. You have three business days to cancel your loan agreement without penalty. 

Credit Card Refinancing or Debt Consolidation: Which Is Better?

Can’t decide between consolidating debt and refinancing it? Credit card refinancing and debt consolidation offer financial relief. The best financial solution for your current situation depends on how many credit cards you have and the current debt amount. 

If you only have one credit card, credit card refinancing is a great option! Borrowers need to pay a balance transfer fee for credit card refinancing. You need to pay a fee for each transfer if you have multiple credit cards. A balance transfer fee can be substantial if you have a lot of debt since it is equivalent to a small percentage of the debt. 

Choose debt consolidation if you have a lot of credit card debt or multiple credit cards. Instead of paying to transfer your various credit card balances to one account, you can get a lump sum to pay off creditors. 

Whether you choose to refinance or consolidate, ensure you take the time to do thorough research. Compare lenders and loan offers to find the most economical option. Making a hasty financial decision can leave you worse off than before applying for a new credit card or loan. 

Can Credit Card Refinancing or Debt Consolidation Hurt My Credit?

Consolidating debt and refinancing it will both affect your credit to an extent. Submitting an application will automatically decrease your credit score. You may have to apply with multiple lenders if you have a bad credit score. However, debt consolidation and refinancing can benefit your credit score over time! 

Your credit score depends on the calculation of five categories:

  • Payment History (35%)
  • Total Debt (30%)
  • Length of Credit History (15%)
  • New Credit Inquiries (10%)
  • Credit Mix (10%)

Your payment history and total debt affect your score the most. When you obtain better repayment terms and lower interest rates, you may find it easier to handle your finances! Having more money in your pocket can help you pay down debt faster. And decreasing the number of monthly bills you pay can help you avoid missed payments. By paying down your debt through on-time payments, you can start to build credit!

The Bottom Line

If your credit card debt has gotten out of hand, consider refinancing or consolidating it! Either option is good when you find it challenging to manage your finances. Ensure you pay attention to the interest rates and additional fees when deciding between a new loan and a credit card. 

Pros And Cons Of Debt Consolidation
Home Equity Loans and Home Equity Lines of Credit

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