Dealing with debts, especially from credit cards, and finding the best way to manage them can be overwhelming. Two common options that people usually use are credit card refinancing and debt consolidation.
Although these two may seem similar at first, they are approaches that work in different ways and can help you manage your finances. You need to know what they are, their similarities, and their key differences. Understanding them is vital for making the right choice for your situation.
What Is Credit Card Refinancing?
Credit card refinancing is a financial strategy to lower the interest rates on your credit card debt. Let’s say you have been using one credit card for a while, and your interest rate was high because you were trying to build your credit history. Or perhaps you owe a lot of money, and the interest rate makes payments more expensive.
One option you can use to refinance your credit card debt is a balance transfer. This means you can apply for credit with better terms and move the money you owe from your old credit card to a new one with better terms, like a lower interest rate.
You can also ask your current credit card company or lender for a better offer. This way, you can pay less interest without switching to a new card. The goal is to reduce your spending on your credit card debt over time.
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What Is Debt Consolidation?
Debt consolidation is a financial strategy that allows you to manage your debt easily by combining multiple debts into one. Let’s say you have several bills to pay each month, like credit card bills, a car loan, medical expenses, and personal loans. Each of these bills has different due dates and interest rates, and it might be hard to keep track of everything.
However, with debt consolidation, you can take all those separate debts and roll them into one single payment. This means instead of paying multiple bills simultaneously, you get to pay one bill each month.
This can make managing your money easier and keeping track of what you owe. It can also give you more control over your finances, especially if the interest rates on the new combined debts are lower than those on your other debts.
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Credit Card Refinancing vs. Debt Consolidation: What’s the Difference?
Debt consolidation and credit card refinancing are two financial approaches people can use to lower their credit card debts. Although the objective of the two strategies is to help pay off debts, they work in different ways.
Credit card refinancing allows you to move your debt to a new credit card that offers 0% interest for a limited time. This time is usually between 12 to 18 months. This means you won’t have to pay extra money on top of your debts during this period.
However, if you do not finish paying off the debts before the 0% due ends, the interest will increase to a high rate. This rate can be between 16% and 20%. Also, there is usually a fee to transfer your debt to this new card, which adds to the total amount you owe. You can use a credit card refinancing calculator to learn how you can manage your debt using this strategy.
On the other hand, debt consolidation means taking out a loan to pay off your credit card debt. This debt consolidation loan has an interest rate of anywhere from 4% to 36%, depending on your credit score and if you can offer something valuable, like a house, as collateral. People with high credit scores (above 720) and those who own a home will likely get the lowest interest rates.
In summary, refinancing credit card debt gives you a temporary break from interest, while debt consolidation gives you a new credit card consolidation loan with the likelihood of a lower interest rate, depending on your financial situation.
The Pros and Cons of Credit Card Refinancing
The following are the pros and cons of credit card refinancing:
Pros of Credit Card Refinancing
- If the new card has a high enough limit, you can pay off all your credit card debts and save money.
- A 0% interest rate means you would not have to pay extra fees on the amount you owe during the promotional period.
- Applying for refinancing is usually quick and easy.
- You can eliminate your debts if you stop using credit cards as much.
Cons of Credit Card Refinancing
- Not everyone qualifies for a 0% interest rate. For longer terms, you need a credit score of at least 670 and above 700.
- The 0% interest period is temporary. It usually lasts between 12-18 months. After that, interest charges between 16% and 20% if you have not paid off the balance.
- The new card limit must be big enough to cover most, if not all, of your current debts.
- There may be fees added to what you owe. It could be about 3%-5% of the transferred balance.
- If you miss a payment or exceed your credit limit, you could lose the 0% interest rate.
- You may not be able to transfer balances between cards from the same bank.
The Pros and Cons of Debt Consolidation
Here are the pros and cons of debt consolidation:
Pros of Credit Card Debt Consolidation
- You have three to five years to pay off the loan.
- Lower interest rates.
- Fixed monthly payments. You know exactly how much to pay each month.
- No collateral is needed.
- If you borrow from family or friends, they might offer low or no interest and more manageable payment terms.
- You will make just one monthly payment instead of paying multiple credit card bills.
Cons of Credit Card Debt Consolidation
- Getting a personal loan to pay off your credit cards can take a while.
- If you use a home loan or equity, like a home equity line of credit (HELOC), your house will be at risk if you can’t pay it back.
- There may be fees for getting the loan, which can add up.
- You might not get the best interest rates if your credit score is not high enough.
- If you do not control your credit card spending, you might end up in debt again, even after consolidation.
If you are trying to determine whether credit card refinancing or debt consolidation is better for your financial situation, it depends on your needs.