At a Glance
Credit card refinancing and debt consolidation are similar enough that they often get confused with one another, but they are not the same. The main difference between credit card refinancing and debt consolidation is that “refinancing” is a term applied when seeking a lower interest rate on a single card, whereas “consolidation” involves batching multiple cards.
Both strategies can save you money, but which of them is better? That’s a question we’ll seek to answer in this article. The answer could very well be dictated by your individual situation, so we’ll try to be as expansive as possible in our explanation of what these terms mean. A good starting point for you would be to check the current interest rates on your credit cards.
Deciding What to Refinance or Consolidate
In 2021, the average credit card interest rate in the U.S. was 19.49%. That doesn’t mean you’re paying 20% on all your credit card purchases. Some cards have lower rates, even 0% during certain introductory periods. But let’s put the low interest cards aside for now. You may not need to do anything with those, other than pay them on time of course.
If you have one or even two credit cards that carry a high interest rate, you may want to look into credit card refinancing. If you have a batch of cards in that category, you’ll want to explore other options. Break out the debt consolidation calculator and get ready. We’ll go over what you need to do in the sections below.
How to Refinance a Credit Card
Balance transfers to lower interest credit cards are a good example of credit card refinancing. What you’re essentially doing is moving the outstanding balance on one card over to another card that offers a lower interest rate. Several credit card companies offer a limited time 0% interest rate on balance transfers for new customers.
Another way to do this is to take out a personal loan to refinance a credit card. The concept is the same as with a balance transfer. Your objective is to find a lower interest rate. As a bonus, a personal loan could also stretch out the amount of time you have to pay off the outstanding balance and lower your minimum monthly payments.
How to Consolidate Credit Card Debt
Refinancing is a great option when you only have one or two credit cards to worry about, but what happens when half a dozen of them are out of control? That’s a situation that calls for debt consolidation. To sum it up in simple terms, add up all the outstanding balances and apply for a consolidation loan to pay them off. There are several advantages to doing this.
First on the list is the interest rates. As stated above, the average interest rate for credit cards in the U.S. is 19.49%. According to Credit Karma, the average interest rate for a personal loan is 9.34%. That’s dependent upon credit score, but the loan option is still a significantly better deal if you want to save money on your credit card debt.
Another advantage to debt consolidation is that personal loans can be taken out with multiple-year payment terms. That lowers your monthly payments due and frees up extra cash to cover essential expenses or even splurge a little on yourself. Of course, you’ll need to stop using your credit cards to make this work. Paying them off is no good if you run up the balances again.
Credit Card Refinancing vs Debt Consolidation
Which of these is the better option for you? This is a finance question, not a credit repair strategy. The answer depends on your individual situation. If you only have one credit card, there’s nothing to consolidate. When your wallet is filled with plastic, consolidation might be a better option. If you’re uncertain, consider the following:
- Credit Card Refinancing: You can lower your interest rates with a balance transfer, but you’ll still have a limited time to pay the balance owed. Some balance transfers offer 0% interest for an “introductory” period. Can you pay the entire balance during that time?
- Debt Consolidation: You’ll be taking out a lower interest loan and decreasing your monthly payments, but this only works if you have the discipline to stop using your credit cards. Can you realistically commit to doing that?
As you can see, there are pros and cons to either method. We’re not going to recommend one over the other. That’s up to you. Both can save you money and make your finances more manageable, but only if you understand the repayment terms and make the commitment to cut your spending. Do that and your credit card debt could become a thing of the past.
Frequently Asked Questions
Is it better to refinance credit card debt?
Refinancing is a decision that should be based on the situation. If your credit card interest rate is high, it’s a good idea to refinance for a lower rate. That can be done by a balance transfer or by taking out a personal loan to cover the outstanding balance on the credit card.
Does refinancing affect your credit score?
Yes, refinancing can affect your credit score. A balance transfer to a new credit card adds a new account to your credit report and a personal loan will require a “hard inquiry” from the lender which will drop your score a few points.
Does consolidating debt ruin your credit?
No, consolidating debt does not ruin your credit, but you may see a drop in your credit score soon after you do it. The consolidation loan is a new account and payments to your credit card companies may not be reported right away. Expect your score to go down temporarily.