Credit Card Refinancing Vs. Debt Consolidation: Comparing Debt Payoff Strategies

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.

There’s no shame in having debt. It’s often due to circumstances out of your control. Just the other day, a crowdfunding campaign appeared on my social media for a friend facing medical emergencies that have piled on and mounting credit card debt with no end in sight.

If you’re one of the Americans sharing in a collective $1.14 trillion in credit card debt, as reported by the Federal Reserve Bank of New York, there are tools you can use to get your situation under control and learn how to pay off debt. Credit card refinancing and debt consolidation are two separate but similar strategies that can help you move forward.

Here’s what you need to know about credit card refinancing vs. debt consolidation — and which might be right for you.

Credit card refinancing vs. debt consolidation: Definitions

• Debt consolidation is the process of combining multiple debts into one new debt.
• Credit card refinancing is the process of paying off high-rate cards with lower-rate debt.

When you realize your debt has gotten away from you, you may be desperate for any solution. Credit card refinancing and debt consolidation are a couple of strategies you’ll find, but it can be confusing to distinguish them.

Here’s why: Refinancing is technically a type of debt consolidation. When you combine your loans into a single payment, that’s debt consolidation. (I did it with my student loans, and it gave me one monthly fixed payment rather than several separate loans with differing terms.) There are several different strategies you can use to consolidate debt, including a debt management plan, debt settlement, or a personal loan.

With credit card refinancing, you take your high-interest credit cards and pay them off with debt that has a lower rate, either with a debt consolidation personal loan or by completing a balance transfer. The end goal is to reduce your interest payments, which could allow you to tackle the principal, save money, and get rid of your debt faster. This is technically a form of debt consolidation.

Types of credit card refinancing

Credit card refinancing can be a great solution if you’re hoping to retain your credit accounts and you can qualify for new credit. Here are some ways to do it.

Unsecured personal loans

With this method, you take out an unsecured personal loan from a bank, credit union, or online lender. Some personal loans are intended specifically for credit card refinancing, but nearly any personal loan can be used to pay off the credit card debt. Personal loans are often available for anywhere from $1,000 to $50,000 and have terms between one and seven years. If you have great credit, you might see annual percentage rates (APRs) in the single digits, but they can reach 35.99%.

I recommend an unsecured personal loan to refinance credit card debt for several reasons. One, you may be paying very high interest rates on credit cards and have a good chance of securing a lower APR on a new personal loan (especially if your credit has improved since you opened up certain cards). Two, you can simplify debt payoff with one fixed monthly payment.

0% APR balance transfers

Another way to refinance credit cards is to open a new 0% intro APR card and transfer your balances to that card. You can often get a balance transfer card with a 0% APR for 12 to 18 or even 21 months. I constantly receive 0% introductory APR balance transfer offers, and you’ve likely seen these, too.

A balance transfer offer gives you time to pay down your debt without incurring any new interest charges. Ideally, you’ll be able to pay off the balance in full before the introductory period ends. But just in case, the new card should have a lower regular APR than your old cards.

Sometimes, a balance transfer is better than a loan, such as if your debt total is relatively small, if the balance transfer fee is lower than the fees charged for personal loans, and if you find a sufficiently long balance transfer period.

You’ll want to pay attention to a couple of factors:

• How long is the introductory period, and can you pay off the balance before the regular APR for balance transfers kicks in?
• How much is the balance transfer fee? Most companies charge 3% to 5% of balances transferred, which is likely much less than the interest you’d pay for a personal loan.

Pros and cons of credit card refinancing

Pros

• Lower interest rate. The biggest advantage of refinancing credit card debt is that you can get rid of the high interest rate attached to credit card debt. A lower rate could save you hundreds — or even thousands — in interest charges.
• Faster debt payoff. Lower APRs can help you get out of credit card debt faster. More of your payments go to reducing the principal, speeding up the process.
• Simplicity of payments. It’s hard to keep track of multiple debts and different rates and payments. Refinancing can give you one monthly payment, which increases your chances of staying on track.
• Minimal credit score impact. Credit card refinancing should not hurt your credit score if you’re responsible with your new credit, other than a slight dip after a hard credit pull. Keeping up with payments and avoiding more debt should positively impact your credit.

Cons

• Credit requirements. Most of the best 0% APR credit cards are only available to those with good credit, so this option won’t help if your credit is limited or damaged.
• Loan amount or credit line limits. If you have a lot of debt, the credit limit on a 0% APR card might not be high enough to refinance all of it at once.
• Fees. Even if you receive a lower interest rate, the fees can outweigh the savings on interest. Be aware of origination fees for personal loans and balance transfer fees for credit cards with 0% APR offers.
• Temptation to overspend. Access to more credit can be tempting if you have a problem running up debt, so you have to work on controlling your spending and budgeting.

Types of debt consolidation

Although we’ve established that credit card refinancing is a form of debt consolidation, there are a few other tactics that fall under that category. Here’s how debt consolidation works with a few possible methods.

Debt management

Debt management, in general, is whatever strategy or process you use to bring your debt under control. It can include creating or inspecting your budget, deciding how much you’ll pay to each creditor, and in what order you’ll prioritize paying individual debts.

However, a more structured option is a debt management plan (DMP), which you’ll hear of if you work with a credit counselor. This is a type of debt consolidation in which you switch to making a single monthly payment rather than multiple loan payments.

A reputable credit counseling company may be able to negotiate with your creditors for different terms, such as a reduced interest rate, lower monthly payment, or fee waivers, as part of your DMP. The National Foundation for Credit Counseling (NFCC) stresses that a DMP is not a loan, nor is it a settlement.

Steps to set up a debt management plan include:

• Meet with a certified credit counselor to discuss your options, which may include a DMP.
• If you choose a DMP, you’ll start making one monthly payment to the nonprofit credit counseling agency.
• Credit counselors may attempt to negotiate with your creditors for reduced rates or fees and will notify each creditor about the DMP.
• During your DMP, you may receive coaching to help you stay on track.
• The credit counseling agency makes payments to creditors on your behalf.
• Once your debt management plan is completed (typically after three to five years), your debt should be 100% paid in full.

Debt settlement

Debt settlement is another form of debt consolidation. Companies such as National Debt Relief and Accredited Debt Relief offer several ways of handling debt, but their primary focus is debt settlement.

Third-party debt settlement companies require you to stop making payments to your creditors and instead make payments to the debt settlement company. The company then repays your creditors on your behalf while negotiating your credit card debt or other balances for you, so you might end up repaying less than you originally owed.

I want to issue a hefty word of caution about debt settlement, though. Your credit will take a hit because you don’t pay off the balance in full and stop paying creditors altogether for several months (or more). There’s also no guarantee your creditors will negotiate, and if they do, the debt settlement company will charge you 15% to 25% of the enrolled debt.

However, debt settlement may be your best option if your debt is large enough that you can’t pay it off in less than three to five years. It helps some people avoid bankruptcy, a last resort.

Consolidation loan

You can also take out a debt consolidation loan to manage your debt. Almost all personal loan lenders allow loans to be used for debt consolidation. When juggling debt payments to various credit card issuers, medical billing companies, and other creditors, it can be really hard to keep up. A consolidation loan offers a more straightforward way out.

Ideally, you’ll get a lower interest rate on the new loan than you’re currently paying overall, which saves you money and weights more of your repayment toward the principal instead of interest. Plus, you get the benefit of making one single monthly payment.

Be sure you read the terms of your new loan carefully and double and triple check that you can afford regular monthly payments.

Pros and cons of debt consolidation

Pros

• Faster progress. With third-party debt consolidation, you may be able to pay off debt or reduce your balance, helping you make progress more quickly.
• One payment. As with refinancing, you end up with one monthly payment, which is easier to manage and helps you avoid missed or late payments.
• Potentially reduced balances. This could be a pro or a con, but if you pursue debt settlement, you may be able to pay less than you owe while still getting those creditors off your back. For extreme debt loads, this can be the best option.
• Potentially improved credit. Paying off debt more efficiently should eventually raise your credit score.

Cons

• Fees. Whether taking out a loan or using a debt settlement plan, you’ll typically pay fees. However, sometimes, that’s still less expensive than languishing in debt for years without making headway. Be sure to shop around for the best consolidation loan rates, and if using debt settlement, don’t pay anything until the company succeeds in negotiating.
• Impact on your credit score. While a debt consolidation loan can have minimal impact on your credit when repaid responsibly, you might see your credit score drop dramatically if you enter debt settlement. I generally only recommend this if it helps you avoid bankruptcy.
• No guarantee of avoiding future debt. While working to reduce debt balances with consolidation is good, you may still find yourself racking up more debt after you’ve paid off a consolidation loan because no form of consolidation addresses root causes of debt.
• Must have good credit for lower rates. If you’re considering a personal loan for debt consolidation, for example, you won’t qualify for the best rates unless your credit has improved since taking on the original debts. So not all debt consolidation will save you money.

FAQs

Bottom line

Take an honest look at your finances to determine what’s best for your debt payoff between credit card refinancing and debt consolidation. Consider your credit score and how much you can afford to pay monthly, as well as how much debt you carry and how long you want to spend repaying it.

If you’ve got a good-to-excellent credit score but just wish you had less debt, credit card refinancing can be the better choice. But if you're struggling financially, other forms of debt consolidation could help you more in the long term.

The key is to avoid falling into the debt trap again. 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.

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