Credit card refinancing vs debt consolidation

The comparison of credit card refinancing vs debt consolidation in terms of their differences and similarities, as well as the advantages and disadvantages of both credit card refinancing and debt consolidation.

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Is refinancing considered debt consolidation?

Yes, refinancing is a type of debt consolidation but not all debt consolidation can be regarded as refinancing.

Credit card refinancing vs debt consolidation

Common reasons for consolidating debts are to take advantage of a lower rate on the new loan, to reduce monthly payments because you are combining multiple small debts into one larger debt, to simplify finances, by having only one payment instead of multiple payments.

On the other hand, credit card refinancing is a way of consolidating your credit cards debts to a new credit card (this is commonly known as a credit card balance transfer). The balances on previous credit cards are paid off and now you have the balances combined to a single credit card account that you have to paying monthly, but from one credit card. Most times, the new credit card offers 0% annual percentage rate (APR), during which your card would not be charged interest. This introductory period of 0% APR can last for 12 to 18 months. It is a good idea to aggressively pay off your debt during this introductory period to avoid being charged interest on any remaining balance once your introductory period ends.

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In both credit card refinancing vs debt consolidation, the individual takes out a new loan to pay off their existing debts.

Credit card refinancing vs debt consolidation differences

  1. Credit card refinancing simply rechannels your debts from multiple credit cards to a single credit card. This new credit card may have longer repayment time so that you have more time as against the shorter term of the old credit card. For debt consolidation, you are transferring multiple debts (from different sources such as credit cards, personal loans, etc) to a single loan; when this happens, your old debts are paid off and you now have a single loan to be paying monthly instead of multiple loans that can be challenging repaying all of them every month, because they have varying interest rates and payment schedules.

Credit card refinancing vs debt consolidation similarities

  1. In both debt consolidation and credit card refinancing, the individual takes out a new loan to pay off their existing debts.
  2. They are all methods of debt servicing.

Credit card refinancing vs debt consolidation advantages and disadvantages

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Advantages of credit card refinancing

  1. The main benefit of credit card refinancing is that you get to reduce your monthly payment, which can help improve your cash flow situation; reducing the risk of default.
  2. Another pro of credit card refinancing is that, if you are able to get a card with 0% APR and no transfer fees, you can quickly pay off all your debt within the introductory period.

Disadvantages of credit card refinancing

  1. While the initial interest rate might be lower, often the interest rate on the new card will be higher than it would have been had you not refinanced your credit cards at all; this often comes after the introductory period.

Advantages of debt consolidation

  1. One advantage of debt consolidation is that it simplifies your finances and reduces the number of monthly payments you need to make to different creditors.
  2. Another advantage is that if you have a lower interest rate on your new loan, this will reduce the frequency with which you need to make extra payments in order to keep up with interest.

Disadvantages of debt consolidation

  1. A major disadvantage of debt consolidation is that you do not reduce the amount that you owe, you just move your debt to a new account.
  2. The interest rate on your new loan may be higher if you have bad credit history and even for lower interest rate, you may pay higher in the long run because longer time for repayment means more money is paid in total interest over time.
  3. Debt consolidation does not change your spending habits, so it might only work if you have a stable income source with a consistent cash flow to meet up with payments of the new loan.

FAQs on Credit card refinancing vs debt consolidation

What is credit card refinancing vs debt consolidation?

Credit card refinancing is a process that takes your existing credit card debt and transfers it to a new card with better terms; while debt consolidation is a process where an individual takes out a loan to pay off all of their existing debts (be it credit cards debt, personal loans, student loans, etc).

Is credit card refinancing the same as debt consolidation?

The answer is yes and no.
A credit card refinancing is a type of debt consolidation, and it is used to roll several credit cards into one larger loan with the hope of lower interest rates and better repayment terms. The result can provide greater clarity on your finances as you make those monthly payments with just a single payment.

But not all debt consolidations are credit card refinancing, and vice versa. There are many other types of debt consolidation other than credit card refinance, such as personal loans consolidation, home equity loans, etc.
In the home equity type of debt consolidation, the homeowner uses their home equity to refinance several debts into one larger loan. The new interest rate is usually lower than before, resulting in a monthly payment that’s more affordable.

Is it a good idea to refinance credit card debt?

Refinancing credit card debt is a popular suggestion made by those who think their current interest rate on their debt is too high. But will refinancing your credit cards save you money and give you a lower interest rate? Or will it just turn out to be another way for banks and lenders to make more money off people already struggling with debt?

Credit card refinancing is when you take out a new loan at a lower interest rate to pay off your credit cards. The concept sounds like it makes sense – why keep paying for high-interest debt when you can refinance to get a better rate? Unfortunately, in reality, this isn’t always the case.

For example, let’s say you have $8000 in credit card balance at an 18% interest rate and decide to refinance your debt at a 12% interest rate. If you think that refinancing will save you big money, think again: if you refinance your debt for five years and plan to pay off the full balance, over those five years you’ll actually end up paying more than you would have if you’d just kept paying the 18%.

In the five years that it will take for you to pay off your debt at a 12% rate, you’ll end up paying a grand total of $8653. In the same time period at an 18% interest rate, you’d pay a grand total of $7417 – so you would actually save over $1500 by keeping your higher interest rate.

Does credit consolidation ruin your credit?

Simply consolidating your debt does not ruin your credit score, but it may ruin it if it’s done in the wrong way. There are important things to know before you go into a debt consolidation loan.

If your credit score is less than 570, or if you have any negative items on your report such as collections or charge-offs, you likely won’t be eligible for a debt consolidation loan.
Credit card refinancing is an option for some, but it’s less common than debt consolidation. The interest rates on credit cards are typically higher than on debt consolidation loans, so many consumers may not benefit from that option.

With the FICO score range running from 301 to 850, a credit score of 701 or better is considered good. It may seem like that should make you eligible for debt consolidation, but it’s important to remember that you won’t be offered the best interest rates available if your score is over 719.

Is credit card refinancing bad?

Credit card refinancing may be a bad idea for you if you have a bad credit score. If you have bad credit, refinancing your debt can be difficult or even impossible. Banks and lenders will look over your credit report before making any decisions about loans, so if you’re in the habit of maxing out your credit cards every month, then chances are you’re not going to qualify for a lower interest rate.

Is it better to pay off debt or consolidate?

It is better to pay off debt if you plan to quickly get rid of your debts, this way, you save money that you would have paid in total interest over a longer period if you were to consolidate.

Is consolidating credit card debt into a personal loan a good idea?

Consolidating credit card debt into a personal loan is usually not the best idea. Most personal loans only have an interest rate of between 10% and 30%. That is very high compared to credit debt consolidation, which can be as low as 5.9% for debtors with good credit. In addition, personal loans usually have a one-time fee that’s in the range of $15 and $95.

Here is a video by SoFi that talks about refinancing.