Credit Card Debt Consolidation vs Refinancing

Consolidating and refinancing are the two major choices when dealing with credit card debt. Which is the better choice depends on how much you owe and your credit score.

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Credit cards are amazingly handy tools. They allow you to pay for practically anything in an instant, no checks or cash required, at least not at that moment.

Bills do come due eventually and if you struggle to pay them off, it’s time to find a solution that will do so without wrecking your financial future. Two such choices would be credit card refinancing and a debt consolidation loan.

What Is Credit Card Refinancing?

Debt consolidation vs credit card refinance

Credit card refinancing is a way for consumers with a good credit score to reduce the interest rate on their credit card debt to 0%, but only for a limited time.

It requires applying for a credit card that offers a zero-interest balance transfer option and has a large credit limit. The card user can transfer debt from other high-interest cards to the new card and not be charged interest on the balance during the promotional period, which typically lasts 12-18 months. After that, the interest rate jumps to its standard rates, which usually are somewhere between 16%-20%.

There also is a transfer fee of 3%-5% of your balance involved. Sometimes one of the cards you now own will offer interest free periods on balance transfers as a promotion. If that isn’t available, shop around for a card that offers a no-interest introductory rate as an incentive.

To make this strategy work, the borrower must have a high enough credit score to qualify for a 0% interest card and be able to pay off the card balance during the no-interest grace period.

What Is Credit Card Debt Consolidation?

Credit card debt consolidation means taking out a low-interest loan to pay off what you owe on high-interest credit cards. It isn’t for everyone. It helps if you have substantial equity in your home, a good credit rating and a steady income. That should qualify you for a home equity loan that can be used to pay off your credit card debt.

The second option, a personal loan, is unsecured and might be harder to get because you are offering no collateral. Since unsecured loans pose greater risks to lenders than loans that use collateral, they generally come with higher interest rates, though seldom as high as rates on unpaid credit card balances.

What Is the Difference Between Debt Consolidation and Credit Card Refinancing?

Debt consolidation and credit card refinancing are two of the most common ways to reduce credit card debt. They have the same goal – reducing the amount of debt owed – but take very different roads to get there.

Credit card refinancing comes with 0% interest rate, but that rate typically expires in 12-18 months. If you haven’t paid off the debt by then, you face the high interest rate charges – 16%-20% – cards usually carry. There is also a transfer fee that will add to the balance owed.

The debt consolidation loan comes with an interest rate that could be as low as 4% or as high as 36%, depending on your credit score and any collateral you can offer. Average debt consolidation loan rates are mostly based on your credit score.

The combination of a high credit score (above 720), plus the collateral of owning a home would put you close to the lowest rate available.

What Are the Pros and Cons of Credit Card Refinancing?

Credit Card refinancing to consolidate debt can work – but a lot of elements have to be in play to be successful. Those include having a high enough balance limit on the new card to put all your credit card debt on it, as well as the ability to pay the card off before the 0% interest rate period ends. And, on top of that, having a good enough credit score to qualify.

If you just want to lower your monthly payment, rather than pay the debt off, you may want to find a lower-interest card to transfer your balances to. If you can switch from a card that charges 21% APR on balances to one that charges 15%, you’ll save money.

Before transferring money to a card with a 0% introductory rate, make sure you consider any balance transfer fees. These are usually 3%-5% and could affect whether it’s a sound financial decision for your budget.

Pros of Refinancing

  • If the card has a high enough credit limit to include all your other credit card debts, you definitely save money.
  • The 0% interest rate means you won’t have to pay interest charges on the balance owed for the duration of the promotional period.
  • Refinancing is relatively easy to apply for and the answer comes quickly.
  • If you are able to reduce your use of credit cards, you could totally eliminate your debt.

Cons of Refinancing

  • Not everyone qualifies. To get a 0% interest rate, your credit score must be above 670 and probably need something over 700 to get more than a six-month introductory period.
  • The 0% rate has a deadline, usually expiring in 12-18 months. Don’t pay it off by then and you’re facing interest charges of 16%-20%.
  • The credit limit on the new card must be large enough to accept all, or most of what you owe on your current cards.
  • There likely will be fees of 3%-5% of the balance transferred. Those will be added to the balance owed.
  • If you make a late payment on the card, or exceed the credit limit, you may be penalized and could lose the 0% introductory rate.
  • You may not be able to transfer balances between cards issued by the same lender.

What Are the Pros & Cons of Credit Card Debt Consolidation?

Credit card debt consolidation gives you more time to pay the debt off at a much lower interest rate. It’s a great deal for those who have good credit and can commit to making payments every month. It can be trickier, and not a great solution, for those who can’t.

Pros of Debt Consolidation

  • Low interest rates.
  • Repayment period of 3-5 years.
  • Fixed monthly payment.
  • If you are able to get a personal loan, you won’t need collateral.
  • A personal loan from family or friends could have lower (or zero!) interest and easier repayment terms.
  • One monthly payment instead of juggling several credit card bills.

Cons of Debt Consolidation

  • If you decide to consolidate debt with a home equity loan, a home equity line of credit (HELOC)or a cash-out refinancing, you put your home up as collateral, which means it could be lost to foreclosure if you can no longer afford the monthly loan payments.
  • If you choose a personal loan, it may take a long time to process.
  • Fees can add up.
  • Your credit score may not qualify you for the best rates.
  • You will be paying on the loan for 3-5 years and if you can’t stop, or at least slow down your credit card spending, you may be stuck again.

Should You Consolidate Credit Card Debt or Refinance?

Weighing consolidating credit card debt vs. credit card refinancing often turns on timing and what your financial situation is. How long will it take you to pay off the debt if there’s no interest compounded? What is your credit score and what are your assets?

If you can’t imagine paying off a refinanced balance during the grace period, a debt consolidation loan probably is a better option. A consolidation loan allows you to pay off your credit card balances immediately and gives you the convenience of making a single monthly payment over an extended period. Unlike credit card debt, a consolidation loan allows you to pay off your balance within three to five years, or longer if you borrow against your home equity.

Choose Credit Card Refinancing If:

  • You have good credit, particularly a credit score of 680 or higher.
  • You can pay off what you owe on a 0% rate card in the 12-18 month introductory period.
  • You get a high enough balance limit on the card to transfer all your high-interest cards to the new card.
  • Your objective is to lower your monthly payment, giving you a better chance of paying everything off.

Choose Debt Consolidation If:

  • Your credit card debt is too high for you to pay it off in the 12-18 months of an introductory 0% credit card offer.
  • You have a house with equity, and can qualify for a low-interest second mortgage or home equity line of credit.
  • You qualify for a personal loan that makes financial sense, including fees and other costs.
  • You can afford the payment on the loan for an extended period of time – up to five years.

Consider a Credit Counselor

If you owe a lot of money, have a low credit score and/or your finances aren’t right for either credit card refinancing or debt consolidation, you may want to consider talking to a credit counselor at a nonprofit credit counseling agency. A credit counselor can help you create a budget, as well as help you form a strategy to eliminate your credit card debt.

The counselor may suggest a debt management plan, which involves combining your various credit cards into one payment. Counselors are granted interest rate concessions by lenders, and can offer  you a plan where they pay down the balances on your credit cards, and you make one monthly payment to the organization. It usually takes 3-5 years to pay off your debt with a debt management plan, and your payment stays the same for that period.

There is a monthly service fee, and the plan will also be reported to the credit-rating agencies and likely will affect you credit score. Your credit score will drop for the first few months of the debt management plan because you are asked to get rid of your credit cards. The good news is, your score will go back up soon enough, because the credit card companies will receive on-time payments every month.

About The Author

Max Fay

Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].

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