credit card refinancing vs debt consolidation

Financing for your needs has become necessary nowadays. That’s why most of us use credit cards and loans to get our hands on things and services, and then we pay the loans and credit card bills back. But sometimes, due to the number of debts, it becomes difficult to manage all of them. That’s where two tools come in handy: credit card refinancing and debt consolidation. But some people confuse these two terms with each other, which are obviously different. So it is necessary to know what is credit card refinancing vs debt consolidation? 

Basically, credit card refinancing is related to managing one debt, while debt consolidation is related to managing various debts into one. It is obvious from their terms that in credit card refinancing, you refinance one loan to get a lower rate of interest, while in debt consolidation, you combine various loans or debts into one to manage easily. 

Let’s get to know more about both of these terms and their key differences. 

What is Credit Card Refinancing? 

Credit card refinancing, alternatively referred to as balance transfer, is the method of transferring credit card debt to another lender’s credit card or loan to save on interest and possibly consolidate multiple balances into one. It usually entails applying for a credit card with a 0% balance transfer option and a high credit limit.

To simply understand, if you have $10,000 in debt on a credit card that charges 18% interest, you could transfer it to a card that charges 9%. To encourage you to transfer your balance to their card, many card companies offer 0% introductory rates.

However, there are multiple strategies for consolidating credit card debt. The first option is to conduct a balance transfer, in which the debt is transferred to another credit card with a lower annual percentage rate. 

The other primary method of credit card refinancing is to obtain a lower-interest loan and use the money to pay off credit card debt. Thus, in an ideal world, the borrower would owe the same sum of money at a rate lower.

What is Debt Consolidation?

When you combine two or more debts into a single financial obligation, that is referred to as “debt consolidation.” You take out a low-interest loan to cover your high-interest credit card debts. It can happen for both loans and credit cards. 

It’s possible to consolidate your debts by moving multiple small credit card balances to a single high-limit card, but this is more commonly done by taking out a personal loan instead.

It may be more difficult to get a personal loan because you aren’t putting up any collateral. In general, interest rates on unsecured loans are higher than those on collateral-based loans, but they are rarely as high as those on unpaid credit card balances.

The second option is to obtain a home equity loan to repay your credit card debt.

What’s the difference between credit card refinancing and debt consolidation?

  • Credit card refinancing and debt consolidation are the two most popular methods for reducing credit card debt. They both want to reduce the amount of debt they owe, but they go about it in very different ways.
  • While credit card refinancing offers a 0% interest rate, this rate typically expires after 12-18 months. On the other hand, debt consolidation loan interest rates can range from 4% to 36%, based on your credit score and the collateral you can put.
  • Credit card refinancing is usually done for one credit card loan; on the other hand, Debt consolidation is done for more than one loan. 
  • Credit card refinancing offers greater variety and flexibility, including 0% introductory offers and no fixed monthly payment. By contrast, debt consolidation gives you a more defined outline of your loan and a fixed interest rate and payment term.
  • Credit card refinancing only allows you to pay your old credit card bill, whereas the money you get from debt consolidation can be used to pay any type of debt. 
  • Credit card refinancing is appropriate for individuals who have small debts that they can repay in less than two years. In comparison, debt consolidation is appropriate for individuals who have multiple debts and require additional time to repay them.

Which is better credit card refinancing or debt consolidation?

It is usually a question of timing and financial situation whether to refinance a credit card or consolidate debt. Credit card refinancing may be a better option if your primary goal is to reduce the interest rate you pay on your current credit cards. However, take care not to get distracted by an introductory rate of zero percent.

On the other side, if you are unable to repay a refinanced balance in the grace period, debt consolidation is likely a better option. Credit card debt consolidation loans allow you to pay off your debts quickly and afford you the convenience of monthly installments over a longer length of time, all while saving you money in the long run.

In simple words, Credit card refinancing is a good option for people who have small debts that they can repay in less than two years. In contrast, debt consolidation is suitable for individuals who have a number of debts and require additional time to repay them.

Is credit card refinancing bad?

It depends on how you use it. Credit card refinancing offers greater variety and flexibility, including 0% introductory offers and no fixed monthly payment. If your primary objective is to reduce the interest rate on your existing credit cards, then this is your option. 

The thing that makes it look bad is the interest rate after the introductory period. There is a time limit on the 0% interest rate, which is usually between 12 and 18 months. Interest rates of 16 percent to 20 percent will be applied if the debt is not paid in full by then.

In addition, 3 percent to 5 percent of the transferred balance is likely to be charged in fees. Those charges will be added to the total amount owed. As a result, it has yet another flaw.

So, credit card refinancing is good in case of small debts and when you can pay the amount in the introductory period at 0% interest. 

Bottom Line

So this was all about what is credit card refinancing vs debt consolidation. We hope now to know the real differences between these two terms, which usually get mixed up with each other. Moreover, if you want to manage your credits, then do proper planning before heading out for one of these options. 

In our opinion, in the case of small debts, credit card consolidation is a good option; however, in case of big finances, debt consolidation is a good option, as it will also allow fixed monthly payments at fixed interest rates. 

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Thank you for reading!