Trying to make headway on multiple debts can be a daunting task. After all, you’re dealing with several minimum payments, interest rates, and monthly due dates. Trying to juggle it all while making meaningful progress on paying down the principal can feel hopeless.
If you’re one of the Americans sharing in $844 billion in credit card debt, there are tools you can use to help you get your situation under control and learn how to pay off debt. Credit card refinancing and debt consolidation are two related strategies that can help you move forward.
Here’s what you need to know about credit card refinancing vs debt consolidation — and how you can make the best choice for your finances.
Credit card refinancing vs. debt consolidation: How they're different
First, it’s important to understand that credit card refinancing is a type of debt consolidation. Any strategy that gets a portion or all of your debt in one place so you can pay it off is a type of debt consolidation.
With credit card refinancing, your strategy is to take your credit cards with high interest and pay them off with a lower-rate debt consolidation loan or by completing a balance transfer. The end goal is to lower your interest payments, which could allow you to tackle the principal and get rid of your debt faster.
Debt consolidation makes use of several different strategies, and one of the most common is to get a third party to organize your debt in a way that helps you manage the payments. With a third-party debt consolidation program, you typically get a customized debt repayment plan and make one payment each month. Then, the company takes care of making sure your creditors receive payment.
For the most part, credit card refinancing requires that you meet credit and income criteria, and it’s something that you mainly handle on your own. On the other hand, there are debt consolidation programs that will accept you with bad credit and manage your transition for you.
Once you look at your situation and compare the possibilities, you’ll have a better idea of which path is likely to work best for you and your finances.
Credit card refinancing: What are your options?
Credit card refinancing can be a great solution if you’re hoping to retain your credit accounts and you can meet the criteria for getting a new loan. Here are some options to consider if you're thinking about refinancing your credit card debt.
1. Unsecured personal loan
With this method, you get an unsecured personal loan from an outside source. You can then take the money and use it to pay off your credit cards. Generally, personal loans come with a fixed interest rate that's lower than the rate you might have been paying on your credit cards, which can make this a good option for consolidating debt.
2. 0% annual percentage rate (APR) balance transfer
One of the most popular ways to refinance credit cards is to open a new account and transfer your high-rate balances to the new card. Generally, the best balance transfer cards offer a 0% introductory APR for a set period of time, usually 12 to 18 months. So instead of paying high interest charges as part of your monthly payments, you pay no interest for a set period and your entire payment can go toward your principal. A word of caution: After the intro period ends, your rate will increase to the regular variable rate, so just make sure you can pay off your balance before then.
3. Specialized credit card debt services
Tally is a company that specializes in helping people manage their credit card debt. Tally not only offers a low-interest line of credit where you can consolidate your existing debt, but it also helps simplify and prioritize your monthly payments. With Tally, you make one monthly payment to them and then they handle all your monthly credit card payments. This option can come in handy if you're feeling overwhelmed and you'd like some assistance with managing your debt.
Pros of credit card refinancing
- Lower interest rate. The biggest advantage when you refinance credit card debt is that you can get rid of the high interest rate attached to credit card debt. By refinancing to a lower rate (or even a 0% APR), you could potentially save hundreds — or even thousands — of dollars in interest charges.
- Opportunity to get out of debt faster. Not only could you save money on interest, but you might also have the chance to get out of credit card debt faster. With less of each payment going to interest charges, more of your money is reducing your loan balance directly. That reduces the length of time you’re in debt, which could lead to freedom sooner.
- Easier to track payments. By consolidating your credit card debt into a single loan or card balance, you could also benefit from having your debts in one place. Instead of having multiple monthly payments to track, credit card refinancing reduces the number of due dates you have to remember. With fewer payments to stay on top of, you might be less likely to miss payments and have your balance increased by late fees and other penalties.
- Minimal effect on your credit score. Plus, with credit card refinancing, your credit score generally remains intact, as long as you keep up with your new loan payments and avoid running up new credit card bills. You might see a slight dip in your credit score when you apply for a personal loan or a balance transfer credit card, but generally, that dip is relatively small and temporary.
Cons of credit card refinancing
- Credit requirements. Most of the best 0% APR credit cards are only available to those with good credit. Additionally, when you apply for a personal loan for credit card refinancing, you’ll go through a credit check and the bank or credit union will review your income.
- Loan amount or credit line limits. Additionally, depending on how much debt you have, the loan you get might not be enough to refinance all of your credit cards. You might only be able to get a small personal loan, or your credit limit on the 0% APR card might not be high enough. However, even if you can’t get all of your credit card debt refinanced, you might still benefit at least a little. You’re still reducing your overall interest rate, which might speed up your debt reduction.
- Fees. Certain lenders charge borrowers origination fees for personal loans, so you might need to account for that cost, depending on the lender you work with. Don’t forget, too, that your 0% APR balance transfer will likely come with a fee. Run the numbers to see if your interest savings are enough to make up for any loan or balance transfer fees.
- New accounts. Another risk of credit card refinancing is the fact that you usually keep your newly-paid-off accounts open. So now you have a new loan, and the temptation to spend on your freed-up credit cards can be strong. If you’re not careful to get at the root of the problem, and stop the spending, you could end up in more debt than you started with originally.
Debt consolidation: What are your options?
For some consumers evaluating the credit card refinancing vs debt consolidation situation, the solution isn’t just refinancing their debt. In some cases, it makes sense to choose a third-party debt consolidation service to manage the debt.
1. Debt management
A credit counselor or debt management company gathers your information. Then, they come up with a customized debt management plan, you make one payment each month, and the company divides it up between your creditors. In some cases, the company negotiates lower interest rates with your creditors so you save money.
2. Debt settlement
Some third-party debt consolidation companies are actually engaged in debt settlement. You stop making payments to your creditors and instead make payments to the debt settlement company. They negotiate your debt with your creditors and settle it using the money you pay each month.
There are other types of debt consolidation companies, but you’re likely to encounter those two as you try to figure out how to get a fresh start with your finances.
Pros of debt consolidation
- Roadmap to success. With third-party debt consolidation, the biggest advantage is a plan. With reputable credit counselors and debt consolidation companies, you’re able to create a roadmap to debt freedom. You enter the program for a set number of years, and the hope is that when it’s over, you’ll be out of debt and have new financial habits to keep out of debt.
- It's off your plate. These debt consolidation strategies also get your payments in one place. You only have to send in one payment each month, and the debt management company takes care of the rest. Whether they’re just paying your debt down as agreed, or whether they’re negotiating settlement, it can be a relief for you to just not have to deal with it.
Cons of debt consolidation
- Fees. No matter which third-party approach you take to debt consolidation and management, you’re probably going to have to pay a fee. However, in some cases, paying the fee is still less expensive than languishing in debt for several years without making headway. Just be prepared for the cost.
- Impact on your credit score. Another issue is the fact that entering a debt management program can impact your credit score. If the program is aimed at helping you manage your payments and the debt company just makes your payments for you, the impact on your credit might be minimal. On the other hand, if you enter debt settlement, you might see your credit score drop dramatically. With debt settlement, the idea is that you stop paying your debts so your creditors will be eager to settle for less than you owe in the hopes that they’ll recover something.
How does refinancing your credit card debt impact your credit score?
Before you’re approved for a personal loan or a 0% APR deal to refinance your credit cards, the lender or credit card company you work with will typically run a hard credit check. However, the impact is likely to be relatively small and easy to overcome.
For the most part, when you refinance your credit cards, you’ll likely be able to maintain your credit standing. Plus, because credit card refinancing pays off your revolving debt, you’ll have greater credit utilization. You could actually end up with a boost to your credit as a result of refinancing. And, of course, as you continue to make on-time payments, your score might improve over time.
How does debt settlement impact your credit score?
If you're thinking about debt settlement to get out of debt, it's important to know how it will impact your credit report. Because payment history has a big impact on your credit history, the fact that you’ll miss payments as the debt settlement company works with your creditors could mean a huge drop in your score.
A lower credit score can make it difficult to get new loans or even get approved for the apartment you want. Before you enter a debt settlement program, make sure you’re prepared for potentially negative credit consequences. Also, carefully vet your debt management company using the Business Bureau and the FTC website to learn how to find reputable credit counseling agencies.
What does it mean to refinance credit card debt?
Refinancing credit card debt typically involves applying for a personal loan or a balance transfer credit card with a lower interest rate as a first step. If you opt for a personal loan, you might use the funds to pay off your high-interest credit card debt, then pay down the personal loan balance over time.
If you opt to apply for a balance transfer credit card instead, the process of refinancing your credit card debt will work slightly differently. Many balance transfer credit cards offer a 0% introductory APR for a set time period, so you might decide to transfer over your high-interest debt to benefit from the 0% introductory rate. This could help you avoid paying costly interest charges during the intro period.
Which is better, refinancing credit card debt or debt settlement?
Refinancing credit cards might be a good choice if you want to maintain your credit score, and keep your access to credit in the future. If your finances are generally good, but you just need a leg up to get rid of the last of your pesky debt, it could be a good choice to refinance.
When you're drowning in debt and things aren’t getting better no matter what you do on your own, debt settlement might be a better choice. With help, you can put together a plan and tackle the debt. If you stick with a reputable program, you could potentially be out of debt in three to five years, and start rebuilding your credit along the way. Being able to get on an affordable plan that may eventually lead to credit recovery can offer peace of mind and a sense of purpose.
The bottom line
Take an honest look at your financial situation to determine whether credit card refinancing or working with a third-party debt consolidation or debt settlement service is the best option for you. Some questions to ponder: Where are you at with your credit score? How manageable is your debt level at this time?
If you’ve got a good to excellent credit score, but you just wish you had a little less debt, credit card refinancing is probably the better choice. But if you're struggling financially, working with a debt management service could help you in the long term.
No matter which option you choose, the key is to improve your financial situation and avoid falling into the debt trap again in the future. Choose the method that is most likely to help you quickly reach your goals while doing the least amount of damage to your current situation.