Credit cards are tools that help us with payments when we need them. However, they can also become a gateway to debt if you’re not careful.
If you cannot pay your bills, you could endanger your finances and future.
If you are dealing with problematic credit card debt, there are two options to take. You either pursue refinancing or debt consolidation.
Each provides distinct advantages and different terms. What you choose will depend on how much debt you have and your credit score to some degree.
What Is Credit Card Refinancing?
Credit card refinancing, otherwise known as a balance transfer, is when you shift your debt to another card with better terms. For example, you move your balance to a card with a lower interest rate to stem the debt’s growth.
It’s a common move with credit cards, which is why some companies offer promos and incentives to shift to them.
Refinancing often happens between companies. A credit card company wants to take your debt and gain you as a customer in exchange for shifting to more favorable terms.
Often, you’ll want to do it simply because of the appeal of a lower interest rate.
However, since it is all about moving debt, it doesn’t get you out of the situation faster. Instead, it helps you lower your monthly payments so you can get back on track.
The Advantages and Disadvantages of Credit Card Refinancing
Credit card refinancing has some noticeable advantages, but there are also some drawbacks. Consider each before committing to this method for your credit card debt:
Advantages
- It is possible to consolidate all credit card debts into a single card through refinancing. It makes it easier to manage as you only have to worry about one payment.
- You can get a lower interest rate if you have a good credit score. Lower interest rates help you save money every month, which can help you start paying off the loan.
- You can extend the repayment terms with a refinance, meaning that you could lower the monthly payments. Doing this while aggressively paying the debt can eliminate the loan faster without putting much strain on your income.
Disadvantages
- Credit card companies are very wary about offering refinancing deals to people with bad credit. It’s hard to justify a lower interest rate if you have a record of poor payments.
- Refinancing doesn’t reduce your debut but only reduces the amount you need to pay each month. You still have to pay the original debt off, and it could still spiral out of control if you miss payments.
- Some lenders will charge additional fees to refinance your credit card debt. They will add the charges on top of the original loan.
What Is Debt Consolidation?
Debt consolidation is combining different debts into a single loan. The advantage is that you won’t have to deal with multiple bills anymore.
Instead, one lender will handle the debt, and you only need to make a single payment with them. Consolidation is one of the best moves you can make if you’ve accrued several balances on different credit cards.
There are two main ways to consolidate:
- You place it on a card with a higher credit limit.
- Get a personal loan.
A higher credit limit card is more of a possibility if you have a decent credit score. What tends to happen most of the time is people take personal loans from a lender.
Most consolidation agreements will have a fixed monthly rate. You’ll pay the same amount each month until you fully repay the loan.
It’s the better option if you want to remove the debt, but it also means you are still retaining the cards that placed you in the situation in the first place. Since you’ve zeroed your balances, you won’t have to worry about compounding interest rates from credit cards unless you get into debt again.
The Advantages and Disadvantages of Debt Consolidation
Debt consolidation often comes as a great deal to those looking to eliminate the loan. However, it can be problematic if you cannot commit to the terms set by the new loan.
Here are the advantages and disadvantages you should look out for before getting into consolidation.
Advantages
- Finding a better lender option can significantly reduce the interest rate and ease the repayment terms. You’ll have to carefully weigh the options between lenders to see who can provide the best deal.
- Since consolidation is an unsecured loan, there is no need to provide collateral. You won’t have to put a valued item at risk to consolidate.
- Consolidation often comes with lower interest rates. It takes a weighted average of all the loans combined, meaning that it will assuredly be less than your highest interest rate from previous debt.
- Consolidations often have repayment plans spanning three to five years. That lowers monthly payments, meaning you have more space to pay off the loan.
- This method combines all your loans into a single payment, making it easier to manage. You only have to deal with the lender who worked on the consolidation.
Disadvantages
- Processing for loan consolidation can take a long time, meaning you have to bear with your debts a bit longer. This tends to be the case with all personal loans.
- If you cannot pay within the repayment period, you’ll only get yourself deeper into debt again. You’ll also need to take control of your credit card spending as you’ll still have access to the cause of the problem in the first place.
- Your credit score can prevent you from getting into good consolidation deals. It can lower the rate, but not as much as you’d expect.
- Lenders can charge fees that will only add to your loan principal. Research the charges and disadvantages to avoid getting into more debt.
- Getting into a consolidation through cash-out refinancing or home equity can put your property at risk. Read the terms carefully as you could end up with your home becoming collateral. The lender will put your home up for foreclosure if you cannot pay.
Should You Choose Credit Card Refinancing or Debt Consolidation?
“You can’t get out of debt while keeping the same lifestyle that got you there.” - Dave Ramsey
There is no fixed answer when it comes to consolidation and refinancing. Choosing a path will depend on several circumstances. Some of your considerations will be:
- Size of the debt
- How long will it take for you to repay the debt
- Your current credit score
- Other assets you have
Choosing Credit Card Refinancing
Refinancing is the option to take if you have a high credit score. If you’re scoring 680 or higher, you’re open to some of the best terms and interest rates available to lenders.
It may also be necessary because you might need a card with a higher balance limit to transfer all the debt to it. If you believe you are in a situation where you can pay off the debt if there’s no compounding interest, take this option.
Refinancing lowers your monthly payment, giving you the space to take care of the loan. With a high credit score, you can open the door to an introductory period.
Some cards have a 0% interest rate for 12 to 18 months. If you believe you can pay the debt during that period, go for it.
Another reason you may want a card is that you want the rewards and features associated with it. The credit card company may offer you enticing options as long as you consistently pay the loan.
As mentioned earlier, companies entertain transfers because they are getting new customers. They’ll want to make the transfer appealing to you.
Choosing Debt Consolidation
Refinancing is risky if you cannot pay the debt within the introductory period. It means that once it does gain an interest rate, the debt will compound once more.
If you see no possibility of refinancing as an option, consolidation will be the best route. You will take on a new loan, which will have you paying a new fee for up to five years.
It’s also an option to take if you have home equity or if you can get a low-interest second mortgage. You can use the property as collateral to hasten the loan and begin paying off the debt fast.
However, this is a higher risk move as missing a payment may default the property.
Take your time to consider the fees, monthly payments, and other costs involved in consolidation. Will it be lower than the debt you have right now?
It doesn’t make sense to move to a new loan if it isn't affordable anyway.
Debt consolidation can be an appealing option if you have other debt. You can put it all together and turn it into a single loan.
The interest rate may even lower since consolidation considers the average of all. The fixed interest rate is also appealing as you won’t have to stress about the changing fees and costs with the new loan.
Careful Considerations
Both options are similar in that you are taking out another loan to try and pay for your incurred debt. Before you get into any methods, don’t rush finding the right lender.
You want to make sure they have the best deals and terms to lessen the burden. Compare rates and offers of lenders you talk to before deciding.
If you’re switching to a new card, you’ll also want to consider if the card has better terms after the introductory period. Card refinancing often has an APR of 16%, the average of most cards.
There is no repayment time, but the clock begins to tick on the introductory period as soon as you make the transfer.
Other Options Available
There are also some variances to refinancing and consolidation that may be advantageous to your situation. Here are some of the other options you can consider before finalizing your move:
- Nonprofit Consolidation (Debt Management) - A nonprofit agency will act as a middleman between you and creditors. They’ll create an agreement and consolidate your loans to cut the interest rate. Instead of paying the creditors, you’ll only pay the agency, and they’ll be responsible for distributing the money among those lenders.
- 401K Collateral - Like home equity, using your 401k as collateral to pay your debt is risky. If you miss a payment, you could lose all your retirement savings. However, it can be appealing since 401k collateralized loans offer lower interest rates, and they do not affect your credit score. Only take this path if you can pay it in full and consistently. If you fail to do so, you could incur penalties and fees that will drive you into a deeper hole. Also, consider that you may be setting your retirement back as you take money reserved for your latter years. It is the last resort when you no longer have any other good options.
Putting It All Together
Credit card refinancing and debt consolidation each have their benefits. They also come with drawbacks that may not be ideal for your situation. It’s best to weigh the pros and cons first.
Go with the option that will be the easiest for you to tackle.
If you’re looking for a reliable financial institution to tackle your credit card debt, consider 121 Financial Credit Union. As a credit union, we prioritize our clients' benefits and ensure they get the best deals.
We can offer rates that aren’t available with traditional lenders like banks. Get in touch today!