If you have credit card debt weighing you down and are looking for some financial relief, you may be wondering what your options are. Two popular solutions you may have heard of are credit card refinancing and debt consolidation, and while both can help you better manage your debt, it’s worth knowing what each one can do for you along with their respective pros and cons so you can make an informed decision.

Read ahead to get started in understanding the key differences between credit card refinancing and debt consolidation and how they pertain to you.

Credit Card Refinancing

Credit card refinancing involves transferring the balance of one or more credit cards to another credit card that has better interest terms. Having a lower interest rate allows you to save money in interest payments. Many credit card companies also offer an introductory rate of 0%. In this scenario, you will not be charged interest for a fixed period of time, after which you could have to pay higher interest rates.

Pros of Credit Card Refinancing

• Quick savings: if you choose to get a 0% introductory offer, this allows for quick, significant savings during the0% introductory offer term, which typically lasts for 12-18 months.

• Convenience: the application process for credit card refinancing is relatively quick and easy. 

Cons of Credit Card Refinancing

• Offer terms that expire: if you do not pay off the balance before the introductory period ends you face typical APR interest, which can place you back into a cycle of credit card debt.

• Penalty APRs: if you make a late payment or go over your credit limit, you could  be subjected to penalty APR’s which can be significantly more than a typical APR. You may also lose your 0% introductory offer.

• Fees: in the case of a 0% introductory offer, there is usually a fee of three to five percent of the total amount transferred, called a balance transfer fee. There could  also be a minimum fee to transfer a balance.

• Variable interest rates: credit card companies can change your interest rates which puts you at risk for having to pay a higher interest rate in the future.

• Continued debt: a credit card allows your monthly payment to be reduced as you pay off the loan. Therefore, if you only pay the minimum payment each month, you may never pay off your debt. 

Debt Consolidation 

Debt consolidation refers to combining multiple loans and/or debts into one loan. For credit cards, you may consolidate your credit card debt into a credit card refinancing loan, which would involve transferring several credit card balances to a single personal loan. These loans offer fixed monthly payments and interest rates, and the loan will last for a fixed period, typically two to five years, after which you will have paid it off.

Pros of Debt Consolidation

• Fixed interest rate: the majority of personal loans have a fixed interest rate, which means that your rates will stay the same for the duration of the loan.

• Lower interest rate: Personal loans tend to have lower interest rates than credit cards, particularly if you have a strong credit score.

• Fixed monthly payment: you’ll pay the same monthly payment for the duration of the loan. A fixed monthly payment also allows for easier budgeting.

• Fixed payment term: by the time your term ends, your debt will be paid in full.

Cons of Debt Consolidation

• Static payment: regardless of how much your loan balance is, you’ll pay the same amount, even towards the end of the loan where the balance may be relatively small.

• Origination fees: most personal loans have origination fees, which are fees associated with the cost of processing a loan.

• Application process: the application process associated with personal loans may be more involved and require more time to process.

Key Differences 

The key differences between credit card refinancing and debt consolidation are stability vs flexibility and the time needed to pay off your debt.

Credit card refinancing has more variability and flexibility, such as options for a 0% introductory offer and no fixed monthly payment. Increased variability also means that your interest rate may increase, and you have no defined point by which your loan will be paid off.

If you are confident you can pay off all or most of your debt before the 0% introductory offer expires, you may find that credit card refinancing is an appealing option.

Debt consolidation, in contrast, provides a more defined outline of your loan with a fixed interest rate and payment term. Debt consolidation also typically allows for a lower overall interest rate compared to credit cards. If you feel you need more time, stability, or structure to pay off your loan, debt consolidation may have the benefits that you are looking for.

Bottom Line

When considering credit card refinancing vs debt consolidation, the choice will ultimately depend on many factors, including your short- and long-term financial goals. Regardless of which route you take, be sure to read the fine print, compare all of your options, and do your research to find the right credit card or lender to meet your needs.

Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances.  The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.