Credit card refinancing vs. debt consolidation


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If you’re overwhelmed by credit card debt, you might be trying to figure out the best way to whittle down what you owe to a more reasonable amount or get to a zero balance.

Two methods to consider are credit card refinancing and debt consolidation. Both strategies can help make repayment of your credit card debt more manageable and even save you money on interest by locking in a lower rate.

But you’ll need to pay off a new credit card or debt consolidation loan in a timely manner, while not running up new charges, or you could wind up with more debt than you started with.

To qualify for either credit card refinancing or debt consolidation, you’ll typically need to have a good credit score.

The key is to look at the pros and cons of each option and determine which choice is best for you.

What is credit card refinancing?

Credit card refinancing involves taking advantage of a low interest rate balance transfer offer. You transfer balances from one or more credit cards to a single card that carries a lower interest rate.

Generally, you’re looking for a credit card that charges an introductory rate of 0 percent APR on balances you transfer for a set period of time, such as 12 or 18 months.

The average credit card interest rate is almost 17.4 percent APR, according to Bankrate data, so paying no interest for a year on the credit card balance you transferred can result in big savings.

You’ll typically have to pay a balance transfer fee if you want to refinance credit card debt. The fees are usually 3 to 5 percent of the amount transferred, so you’ll need to add that into your calculations. If you’re transferring $5,000 with a 3 percent balance transfer fee, that means you’ll be paying an extra $150.

You also need to look for a balance transfer credit card that doesn’t come with an annual fee. Otherwise you’ll be paying even more money in extra fees.

Your credit history and credit score will impact the interest rate you pay on the balance transfer card once the introductory 0 percent APR period ends.

Use Bankrate’s credit card balance transfer calculator to see how much you could save with a balance transfer.

While a balance transfer can be a great way to refinance credit card debt, you need to be sure to pay off the entire amount you transferred before the introductory period ends. Otherwise, you’ll wind up paying steep interest charges, which could top 25 percent APR.

A good repayment strategy is to divide the amount you owe on the new balance transfer card by the number of months you are charged zero interest. For example, if your new balance is $5,000 and you have 18 months at 0 percent, make a payment of about $278 each month and you’ll be paid in full by the time the introductory rate ends.

You also need to be sure not to incur other charges on the new credit card, or you could be facing even more debt.

What is debt consolidation?

Debt consolidation is when you transfer your credit card debt or other types of debt into a single loan, usually one that comes with a lower interest rate than what you’re paying on your original debts.

You can get an unsecured personal loan from a bank, credit union or online lender, and you don’t need to put up any collateral, such as your home or car. You can typically use funds from a personal loan for many purposes, including debt consolidation. The length of the loan can vary from lender to lender, but they typically range from 12 months to five years.

The average interest rate for a 24-month personal loan was 10.21 percent as of November 2019, according to Federal Reserve data. The actual interest rate offered to you can vary based on the length of the loan or the amount borrowed, as well as your credit score and credit history.

Typically, there are no additional fees for the loan, and you’ll probably be paying the loan back for several years.

With a debt consolidation loan, you’ll pay back a set amount each month for a certain period of time. You’ll pay interest for the entire length of the loan.

Credit card refinancing vs. debt consolidation

With credit card refinancing, you’ll have more control over the amount you pay back each month, but you’ll need to make at least the minimum monthly payment during the introductory 0 percent APR period.

And you’ll need to pay off the entire amount transferred before the introductory period ends to avoid steep interest charges on the remainder of the balance.

You will also usually pay a balance transfer fee between 3 and 5 percent of the balance transferred, adding to your costs.

If you use a personal loan for debt consolidation, you’ll have to pay interest throughout the life of the loan. The current rate is about 10 percent APR, but you can find loans with much lower APRs if you have great credit. There usually aren’t other fees for the loan.

You’ll need to pay a certain amount each month, so make sure to have enough room in your budget to cover that payment.

With either option, try not to run up new balances on your credit cards, or else you’ll be facing even more debt.

Bottom line

When you weigh credit card refinancing vs. debt consolidation, you’ll have to determine which option will save you the most money and is the best fit your budget.

While refinancing a credit card will mean you’ll pay no interest on the balances transferred for a set amount of time, such as 12 months, not paying the loan off during that introductory period can be very costly once higher interest rates kick in.

With a debt consolidation loan, you’ll pay interest over the life of the loan, but don’t have to worry about having the rate change at some point.

Whichever you choose, you should also focus on changing your spending patterns so you aren’t repeatedly transferring balances from credit card to credit card, or repeatedly taking out personal loans, while running up more debt.