Credit Card Refinancing vs Debt Consolidation: Which Is Better?

Debt consolidation and credit card refinancing are two common methods you could use to repay debts you owe. Although they have similarities, debt consolidation and credit card refinancing are not the same, and one may be a better option for you, depending on your financial situation.

Read on to learn more about credit card refinancing vs. debt consolidation to help determine which method makes sense for your needs.

What Is Credit Card Refinancing?

Credit card refinancing is the process of transferring high-interest credit card debt to a new loan or credit card with a lower interest rate, helping to reduce interest costs and make repayment more manageable.

How Does Credit Card Refinancing Work?

Two common ways to refinance credit card debt are by using a balance transfer credit card and taking out a personal loan.

Balance Transfer Credit Card

A balance transfer credit card typically charges no interest on balances transferred from other credit cards for an introductory period of time, which might range from 12-21 months. During that time, you could work on paying down your debt without accruing additional interest.

Many of these cards charge a balance transfer fee that’s generally about 2%-5%. Even with the fee, a balance transfer card could be worth the cost if you would be saving money overall. However, you generally need a good credit score to qualify for a balance transfer card.

Personal Loan

You may also refinance credit card debt by taking out a personal loan. Personal loans are flexible, which means you may use them for a variety of purposes, including refinancing existing debts. With a personal loan, you get a lump sum that you could use to pay off your credit cards. You then pay back the loan in regular monthly installments.

Before you refinance with a personal loan, you may want to compare the interest rate of the loan with the interest rate of your existing debt. The average personal loan interest rate may be relatively high, but your existing credit card annual percentage rate (APR) could be even higher. It’s wise to look at all options to make an informed decision.

Pros and Cons of Credit Card Refinancing

There are advantages and disadvantages to credit card refinancing that you should consider when deciding whether to refinance your credit card debt. These include:

Pros

• You may be able to get a lower interest rate.

• Your monthly payments might be lower, especially if you extend your repayment term.

• You may be able to pay down debt faster because less of your money is going to interest.

• Some refinancing options, such as balance transfer credit cards, have an introductory period where you pay little to no interest.

• You could consolidate multiple credit card debts through refinancing and simplify your payments.

Cons

• The interest-free period on balance transfer cards is for a limited time.

• You may need to pay fees for balance transfer cards or personal loans.

• If you are not motivated to pay down the debt, you could end up with even more debt.

• You may need a high credit score to qualify.

Understanding Debt Consolidation

Debt consolidation is when you take multiple debts and refinance them into one new loan. It’s different from debt settlement, which is when your lender or creditor agrees to settle a defaulted or delinquent loan on modified terms.

There are a number of ways to consolidate debt, including balance transfer credit cards and debt consolidation loans. Whatever method you choose, debt consolidation could help simplify your payments and make them easier to manage.

Credit Card Refinancing vs Debt Consolidation: Similarities

Credit card refinancing and debt consolidation have multiple similarities, and people may confuse the two terms. Here’s what they have in common:

• Both credit card refinancing and debt consolidation are methods of paying down debt.

• You could use a balance transfer credit card to refinance credit card debt and for debt consolidation.

• Likewise, you could use a personal loan for both debt consolidation and credit card refinancing.

Recommended: How Does Debt Consolidation Affect Your Credit Score?

Credit Card Refinancing vs Debt Consolidation: Differences

Despite their similarities, credit card refinancing and debt consolidation do have several key differences, and it’s important to understand them.

Is Credit Card Refinancing or Debt Consolidation Better?

Determining whether credit card refinancing or debt consolidation is a better option depends on your financial situation. Consider the amount and type of debt you have, what your main goal is, and whether you could get a lower interest rate with refinancing to save money.

Also, keep in mind that in order to fully benefit from a balance transfer card, you may want to pay down your debt within the interest-free time frame. As long as you are able to do that, you might save money on interest. With a personal loan, you may get more time to repay your debt — generally up to seven years — but you start paying interest immediately. Your monthly payments may be lower with a longer loan term, as well.

In the end, if you are overwhelmed by making multiple loan payments each month, debt consolidation may be the better choice for you. However, if you would like to lower your credit card interest rate and you’re confident you could pay down your debt before the interest-free introductory period ends, credit card refinancing may be the right option. Think through the different scenarios to help make your decision.

The Takeaway

Choosing between credit card refinancing and debt consolidation comes down to your financial goals. If you’re struggling to balance multiple monthly payments, debt consolidation is an excellent way to simplify your finances into a single, manageable loan. On the other hand, if your priority is saving money by lowering your interest rates, refinancing might be the smarter strategy, provided you’re able to pay down the debt before any introductory periods end. Take the time to examine your unique situation to decide which path could work well for you.

If you’re exploring the idea of refinancing or consolidating your debt with a personal loan, it’s wise to shop around for a loan with the best rates and terms. Lantern by SoFi makes the process easy. By filling out one simple form, you can get options from multiple lenders all at once in our online marketplace.