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Credit Card Refinancing vs Debt Consolidation
In this article, you will learn the difference between credit card refinancing vs debt consolidation and which one will work best for your situation.
Credit card refinancing and debt consolidation are two well-known terms that have a lot in common.
However, it matters which one you choose. One will result in a cheaper interest rate, while the other will provide you with a specified amount of time to repay your credit cards.
If you have significant credit card debt and a high-interest credit card, you will find yourself trapped in an endless cycle of minimum payments and additional debt.
There are a few of strategies to dig yourself out of this hole, credit card refinancing or debt consolidation.
On the surface, they appear to do the same thing. That may be true to some extent.
However, the manner in which they accomplish this can be quite different.
As a result, if you’re considering either, you should prioritize whether you want a reduced interest rate or to pay off your credit cards.
What is credit card refinancing?
Credit card refinancing, alternatively referred to as balance transfer, is the process of transferring a credit card balance from one card to another with a more favorable pricing structure.
This may also imply transferring a $10,000 amount on a credit card with a 19.9 percent interest rate to one with an 11.9 percent interest rate.
Numerous credit card firms also offer cards with a 0% introductory rate to entice you to transfer an existing balance to their card (see below).
In this case, you can save 8% per year, or $800, by transferring a $10,000 balance based only on the usual interest rate.
If, on the other hand, the identical credit card has a 0% introductory rate for 12 months, you’ll save roughly $2,000 in interest in the first year alone.
Refinancing a credit card is primarily about lowering your interest rate. It is typically less helpful in getting out of debt than debt consolidation, as it only transfers a loan balance from one credit card to another.
How is Debt Consolidation Defined?
In general, debt consolidation entails consolidating many credit card balances into a single loan with a single monthly payment.
Consolidation can sometimes be conducted by consolidating numerous modest credit card balances onto a single large credit card, although it is more frequently handled through the use of a personal loan.
Personal loans are normally unsecured, but they come with a fixed rate of interest, fixed monthly payments, and a fairly defined loan term.
This means that you will have the same monthly payment each month, at the same interest rate, until the loan is completely repaid.
If you’re wanting to pay off credit card debt, debt consolidation is almost always a better option than credit card refinancing.
This is because a debt consolidation loan matures at the end of the period, whereas credit card refinancing locks you into an endless revolving payment arrangement.
Advantages and Disadvantages of Credit Card Refinancing
Advantages
0% interest on debt transfers – credit card issuers regularly make offers that include a zero-interest credit line for a specified period of time, typically six to 18 months after a balance is transferred.
As previously stated, this can result in significant temporary interest expense savings.
Quick application process – While personal loan applications may take several days to process and may require additional documentation to verify your income, credit card applications normally consist of a single online form and, in most circumstances, you’ll receive a decision within a minute or two.
You’re transferring one credit card debt to another with a lower interest rate – the greatest immediate benefit of a credit card refinance is obtaining a reduced interest rate.
This can be accomplished by either the temporary 0% introductory rate offer or a lower permanent rate.
As you pay down your credit card amount, you can re-access it as a new source of credit — because credit cards are revolving accounts, any debt you pay off can be accessed later as a new source of credit.
Once the line is completely paid off, you will regain access to the entire balance.
Disadvantages:
0% interest rate will expire – as alluring as 0% introductory rates are, they always expire.
When they do, the permanent interest rate is typically in the double digits.
It’s even likely that the permanent rate will be higher than the rate on your credit cards at the moment.
Variable interest rates – in contrast to debt consolidation loans, which have set interest rates, credit card refinances remain credit cards and hence have variable interest rates.
Your initial rate of 11.9 percent may increase to 19.9 percent at some point in the future.
Balance transfer costs — this is a little-known fee that is assessed on practically every credit card that offers a balance transfer option, especially those with a 0% introductory rate.
The transfer fee is typically three to five percent of the transferred sum. This might add up to $500 to the cost of transferring $10,000 in balance.
You may never repay the balance – because credit cards are revolving accounts, there is a good risk you will never repay the balance.
This is because, at the very least, your monthly payment decreases as your loan balance decreases.
This is why credit card debt consolidation is rarely the greatest option for eliminating credit card debt.
The Advantages and Disadvantages of Debt Consolidation
Advantages:
➣ Although personal loans may have variable interest rates, the majority have fixed rates. This ensures that your interest rate will never increase.
➣ Rates may be lower than those on credit cards—in many circumstances, particularly if you have good credit, you will pay less interest on a personal loan than on your present credit cards. Personal loan rates in the single digits are attainable.
➣ Monthly payment that is fixed — this indicates that your payment will be consistent until the loan is completely paid off.
➣ Personal loans have a limited duration, and at the conclusion of that term, your debt will be completely paid off.
This is why debt consolidation with personal loans is more effective than credit card refinancing in paying off revolving debt.
Disadvantages:
➣ Payments never decrease – for example, if you pay $400 a month on a $10,000 loan, your payment will remain $400 once the $5,000 amount is paid off.
➣ Personal loans do not often have balance transfer fees, although they do have origination costs that work similarly.
They can range between one and six percent of the new loan amount, depending on your credit.
➣ Personal loans typically require a more rigorous application process. This will require not only a credit check, but also confirmation of your income and certain financial holdings.
➣Could set you up to re-use your credit cards – one of the hidden dangers of any debt consolidation agreement is the possibility that you will use consolidation to reduce your monthly debt payments but then re-use your paid-off credit cards.
Which is the Best Option for You?
If your primary objective is to reduce the interest rate on your current credit cards, credit card refinancing may be the better option. Simply be cautious not to become too fixated on a 0% introductory interest rate deal.
That makes sense only if the new credit card’s permanent interest rate is also significantly lower than the interest rate on your current credit cards.
If your primary goal is to entirely pay off your credit card bills, debt consolidation with a personal loan is the preferable option.
The fact that personal loans have defined terms, typically three to five years, increases the likelihood that you will pay off your debt fully.
Whichever path you take, thoroughly assess the new loan’s interest rate and fees, and never, ever disregard the fine print!