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.
Main Differences Between Credit Card Refinancing and Debt Consolidation
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.
How Credit Consolidation Works
With credit card refinancing, your strategy is to take your credit cards with high interest and pay them off with a lower-rate loan. A smaller portion of your payment goes toward interest, allowing you to tackle the principal and get rid of your debt faster.
How Loan Consolidation Works
Debt consolidation makes use of several different strategies, 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 make one payment each month, and 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. Remember, getting out of debt — even if you have bad credit — is possible.
Credit Card Refinancing Pros and Cons
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.
Most Popular Ways to Refinance Credit Cards
1. Unsecured Loan
With this method, you get a personal loan from an outside source. You take the money and use it to pay off your credit cards. The personal debt consolidation loan usually has a lower interest rate than the high-interest you’ve been paying on your credit cards.
2. 0% 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. You have an introductory period, usually 12 to 18 months, where your entire payment goes toward destroying the principal.
Both of these methods have their advantages and disadvantages. Be aware of the risks before you move forward.
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 debt, but they also help 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.
Advantages of Credit Card Refinancing
The biggest advantage when you refinance credit card debt is that you get rid of the high interest rate attached to credit card debt. By refinancing to a lower rate (or even a 0% APR), you save hundreds — or even thousands — of dollars in interest charges.
Not only can you save money on interest, but you also have the chance to get out of 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, leading to freedom sooner.
You can also benefit from having your debts in one place. Instead of having multiple monthly payments, credit card refinancing reduces the number of due dates you have to remember. You’re less likely to miss payments and have your balance increased by late fees and other penalties.
Plus, with credit card refinancing, your credit score remains intact, as long as you keep up with your new loan payments and avoid running up new credit card bills.
Downsides to Credit Card Refinancing
First, in order to take advantage of credit card refinancing, you need to meet certain criteria. Most of the best 0% APR balance transfer credit card offers 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 lender will review your income.
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, and you can speed up your debt reduction. And, even if you’re not down to only one payment a month, you’ve still reduced the number of your bills.
Don’t forget, too, that your 0% APR balance transfer probably comes with a fee. Run the numbers to see if your interest savings are enough to make up for the balance transfer fee.
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 Pros and Cons
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 specialist to manage the debt.
Common Approaches to Using Third-Party Debt Consolidation
1. Debt Management
A credit counselor or debt company gathers your information. You make one payment each month and the company divides it up between your creditors. In some cases, the debt management 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 money you send 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.
Advantages of Debt Consolidation
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.
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.
Downsides to Debt Consolidation
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.
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, chances are the impact to your credit will be small.
On the other hand, if you enter debt settlement, you can expect to see your credit score drop dramatically. With debt consolidation through 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.
With a lower credit score, it can be difficult to get new loans, including car loans, or even get approved for the apartment you want. Before you enter a debt settlement consolidation program, make sure you’re prepared for the negative credit consequences.
How Refinancing and Consolidation Affect Your Credit
We’ve touched on credit score a little bit above. If you’re worried about your credit situation, you’ll need to think very carefully about whether to go with credit card refinancing or debt consolidation.
How Credit Card Refinancing Helps Your Credit Score
With credit card refinancing, you’re likely to see a small drop in your score as lenders check your credit report. Before you’re approved for a personal loan or a 0% APR deal to refinance your credit cards, your credit will be checked. However, the potentially negative impact is likely to be relatively small and easy to overcome.
For the most part, when you refinance your credit cards, you’re 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 will improve.
Your best results come if you can keep all your credit card accounts open after refinancing. When you close accounts, you impact your credit utilization, so your credit score can take a hit.
If you’re not sure you have the self-control to avoid racking up a bunch of new debt, consider closing all but one or two credit cards. Put those cards in a hard-to-reach place, and use them only to automatically pay one recurring bill a month — and make sure you pay off that balance.
You’ll be able to keep your credit score intact (and improve it) while reducing the risk that you’ll end up back in debt.
The Credit Risk of Debt Consolidation
When you go through an approved credit counselor to create a debt management plan, you can see an impact on your score. However, if the plan involves a third-party managing your payments and sending the required amount on time, you’re unlikely to see a big problem with your credit. And, as you stick to the program, your credit could improve.
The problems come in when your debt consolidation strategy hinges on settlement. Because payment history is a big aspect of your credit score, the fact that you’ll miss payments — and probably several of them — means a huge drop in your score. You could see your score plummet more than 200 points within a few months of joining a debt settlement program.
Another risk is that a company might decide not to settle. They could actually sue you instead. If there’s a judgment against you, that’s another negative mark on your credit report bringing down your score.
Finally, you have to watch out for scams. Eventually, as your debt is settled or you complete a debt management program, your score will begin to improve. Unfortunately, though, a scammer could take advantage of your desperation. You send payments, and later find out that it’s all been a scam. The money is gone, you haven’t made progress, and your credit score is in ruins.
Credit Card Refinancing vs Debt Consolidation: How to Choose Which is Right for You
Take an honest look at your financial situation. 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 a good choice.
What Does it Mean to Refinance a Credit Card?
With credit card refinancing, you’ll get a lower overall interest rate. However, the credit card will still be open, even though you’ve paid it off. In order to make sure this is the right move for you, it’s important to attack the root cause of the problem. Discipline your spending so you aren’t getting into more debt.
If you really aren’t sure you’ll be able to avoid building up new debt, consider canceling your paid-off cards. However, realize that it could negatively impact your credit score to get rid of all your credit card accounts at once.
Is It Better to Refinance to Pay Off Credit Cards?
Refinancing credit cards can 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 can be better to refinance. But it’s not always the best choice for everyone.
When Debt Consolidation is Better
If your credit is already shot and you’re overwhelmed by your debt level, debt consolidation can be the best choice for you. In fact, if you have bad credit, credit card refinancing might not even be an option.
When you feel out of your depth, and things aren’t getting better no matter what you do on your own, third-party debt consolidation and management can be a way out. With help, you can put together a plan and tackle the debt. If you stick with a reputable program, you can be out of debt in three to five years, and start rebuilding your credit along the way.
When your credit is already in shambles, entering debt settlement won’t make a huge difference in the long-term outcome. Because your score is already low, missing additional payments might not change the equation all that much. On the other hand, being able to get on an affordable plan that eventually leads to credit recovery offers peace of mind and a sense of purpose.
No matter what 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.