Both the terms are very different from each other and you must understand the difference between the two otherwise you might get in trouble.
If you have a ton of debt on your credit card and due to late payments or only making minimum payments, the interest rate has shut up to the sky, you can do credit card refinancing to reduce the interest rate or shut it off altogether for a limited time.
Even though it is not available all the time, and you might use it when you need it, if your credit card provider gives you this opportunity, it is good to know what it is.
You need to apply for a credit card without an interest rate balance transfer option that has enough credit limits to transfer your debt.
Once you transfer your debt to the new credit card, you can make use of this zero-interest-rate card for a limited amount of time, generally around 16 to 18 months.
After that, you get your previous interest rate.
- Debt consolidation allows you to take bigger loans with better pay-out terms like lower interest rates or extended payment periods.
- Debt consolidation is not for everyone because you need to provide equity or collateral for it.
- Going for debt consolidation is a more concrete choice because refinancing is only for a limited amount of time.
What Is Credit Card Refinancing?
Credit card refinancing allows a person with a good credit score to their debt to a new credit card that allows them to reduce their interest to 0% for a limited period of time.
For this the person requires to purchase a new credit card that offers “zero-interest balance transfer.”
After this, the person can transfer their debt from their high-interest credit card to this new card and they will not be charged any interest rate until the promotional period ends (ideally lasts for 12-18 months).
After the promotional period ends, they would have to start paying the standard credit card interest rate of 16-20%.
Also, note that you can transfer the amount upto the credit limit of the new credit card. 1
Pros and Cons of Credit Card Refinancing
- You can include all your credit card debts if your new credit card has a very high limit. And this can help you in saving a lot on interest.
- Easy to apply for.
- High possibility of eliminating your debt if you reduce the use of your credit cards.
- You will not have to pay an interest rate on your debt until the promotional period lasts.
- Some cards require a transfer fee of 3-5%.
- You can transfer debt only upto the credit limit of the card.
- To qualify, you need to have a credit score of more than 670. And for most cards, you need more than a 700 credit score to get a promotional period of more than six months.
- Lasts only till the promotional period ends.
- Exceeding the credit limit or making late payments on the card can lead you to lose a 0% introductory rate.
- Not repaying the credit card debt before the promotional period ends can lead you into a spiral of debt again.
How To Refinance Credit Card Debt?
What Is Debt Consolidation?
Debt consolidation is the process of taking out a newer, bigger loan with better pay-out terms like lower interest rates or extended payment period times to pay your other high-interest terms or combining all of your loans altogether under one umbrella with favorable options to pay it off.
It is not for everyone, as taking out a loan might require collateral, and if you don’t have the equity to do so, it might be hard for you to do it. 2
- 10 Best Debt Relief Companies For Debt Consolidation
- How Does Debt Consolidation Work?
- How Many Women Are In Debt?
- What Is Credit Counseling?
Pros & Cons of Debt Consolidation
- The low-interest rate on a personal loan helps to save a lot of money.
- Fixed monthly payments allow you to manage daily expenses better.
- You do not have to bear the stress of juggling several credit cards.
- The repayment period lasts for 3-5 years.
- Getting a personal loan from a family member or a friend can offer you an longer repayment period along with lower interest rate.
- You will require collateral if you choose to consolidate your debt with HELOC, home equity loan, or cash-out refinancing.
- Still not repaying your loan can lead you to lose your collateral or your property.
- Personal loans take a long processing time.
- To get the best rates, you need to have a good credit score.
- Fees add up quickly. 3
What Is The Difference?
The main difference between credit card refinancing and debt consolidation is that in one of them, you use a favorable option that is only for a limited amount of time, a maximum of 18 months, and it is not available all the time.
Your credit card provider needs to have this option. Debt consolidation is taking out another loan, probably a bigger one, or combining all of your loans together to create a better-paying scheme until you pay off all your debt.
Which One Should You Go For?
The decision to go for either one of these options depends solely on your needs and how big your debt is.
Here are a few tips that will help you in making an easy decision:
Go for credit card refinancing if:
- You can pay off your debt within the 0% introductory period.
- Have a credit score of 670 and above.
- Your goal is to lower your monthly payments.
- You can find a credit card with a high enough limit to transfer all your credit card debts.
Go for debt consolidation if:
- Your credit card debt is too high to be paid off in just 12-18 months (introductory period).
- You do not have the best credit score.
- You can afford to make dedicated monthly payments for a longer period of time.
- If you qualify for a low-interest home equity line of credit or second mortgage.
Also Read: 10 Best Credit Monitoring Services
What Should You Do When You Do Not Qualify For Both Options?
If you do not qualify for both credit card refinancing and debt consolidation, have very high debt or have a poor credit score, then you should talk to a credit counselor.
A credit counselor will be able to come up with a repayment plan and will be able to help you create a strategy or a budget to eliminate your debt.
A credit counselor may suggest you opt for a debt management plan which includes combining all your credit card debts into one single payment.
Lenders offer concession rates to credit counselors, so you may be able to repay your loans for a lower interest rate with their help.
This would require you to pay them a fee and would also plummet your credit score. However, if you keep making your payments on time, your credit score will rise back up in no time. 1
To conclude, credit card refinancing and debt consolidation are actually similar stuff that aims to make your loan payments easier, but one of them is only for a limited amount of time and is not available all the time with every provider; the other one is easier to do and has no time limit.
Once you go through the process of consolidation of your debt, it will be like that until you pay all of it off.
But, it is worth noting that taking out another loan with better payment options is hard, and you might need some equity to get this loan.
What is better debt consolidation or credit card refinancing?
Credit card refinancing is better if you want to save money on the interest rate, whereas if you want to maintain federal loan benefits, then you should opt for debt consolidation. 4
Can credit card refinancing damage my credit score?
Yes, credit card refinancing can damage your credit score in the short term. However, if you make your on-time payments on time, then it will rise back up in no time.
How much debt qualifies me for refinancing?
Having a debt-to-income (DTI) ratio of 36% or less, along with a credit score of 620 or more, will qualify you for refinancing.
Traci is a highly experienced debt resolution expert with over 8 years of expertise in helping people become debt-free through various debt relief programs. As a former employee of a well-known debt relief company, she possesses exceptional knowledge and skills to take care of debt-related issues.
When not writing about debt, Traci can be found conducting in-depth research on the latest developments in the industry to ensure that she stays up-to-date with the latest trends and strategies.
The National Planning Cycles is committed to producing high-quality content that follows industry standards. We do this by using primary sources, such as white papers and government data alongside original reporting from reputable publishers that were appropriate for the accuracy of information while still being unbiased. We have an editorial policy that includes verifiable facts with due credit given where applicable.