Credit Card Refinancing vs. Debt Consolidation: What’s the Difference?
Credit card debt is a problem for millions of Americans (about 189 million, to be exact). And for many, it’s hard to get out of it.
With an average balance of $ 8,398 per household, credit card debt can pose a growing challenge. Making minimum payments can keep you afloat, but as interest accumulates, tackling that debt – and eventually getting out of it – starts to seem more difficult than ever.
Credit card refinancing vs debt consolidation
If you are facing high credit card debt, there are two strategies that can help: credit card refinancing and debt consolidation.
Credit card refinancing
“’Credit card refinancing’ is a fancy way of saying ‘balance transfer offer’,” said Howard Dvorkin, chartered accountant and president of Debt.com.
Put simply, it’s when you use a new card – one with a low interest rate or 0% for six to 18 months – to pay off the balances on all of your other cards. This allows you to reduce your debt without accumulating additional interest along the way. If you’re looking for a zero percent credit card, head over to Credible to compare cards and see what they can do for you.
According to llian Georgiev, CEO and co-founder of personal finance app Charlie, the benefits of this move can be huge.
“All the money you pay each month is applied directly to the principal instead of being divided between the debt you owe and the interest,” Georgiev said. “It’s a quick fix when it comes to debt repayment. “
Credible can help you find the right credit card for you. Choose zero percent credit cards and get a breakdown of annual fees, welcome offers, credit needed, and more.
However, refinancing your credit card isn’t the perfect solution – and it certainly comes with downsides and risks, according to the pros. On the one hand, transfer fees are generally required.
“You have to do the math to see if you get a better deal, and it’s easy to mess it up,” Georgiev said. “The bank is betting that you will and that is why they are offering you the deal. “
There can also be significant late fees if you don’t make your payment on time or, if you don’t pay your balance or transfer it before the promotional rate expires, you could end up paying a rate. of interest even higher than at present. .
HOW TO OBTAIN A BALANCE TRANSFER CARD
Debt consolidation is a different option. This uses a personal loan to consolidate all your debts – credit cards, car loans, student loans, etc. – in a single balance.
“Consolidation loans can take care of credit card debt, unpaid medical bills, collection accounts and payday loans,” Dvorkin said. “A consolidation loan can also lower a person’s monthly debt payments, lower their interest rate, and help them get out of debt faster. “
If you have a lot of high interest debt, consolidating it can usually mean a lower interest rate and less interest paid over time. It is also easier to manage payments.
If you think a loan like this might be the best choice for you, visit an online marketplace like Credible to get a feel for your debt consolidation loan options.
3 WAYS TO ELIMINATE CREDIT CARD DEBT
“You replace a bunch of loans, with a bunch of conditions, with one loan that you can figure out,” Georgiev said. “It’s predictable, and just like with a car loan, your monthly payment is fixed and has a fixed end date. This makes budgeting easier.
Again, this solution is not perfect. Consolidation loans come with a set-up fee, annual fee, transfer fee, etc., and there isn’t much flexibility. “You agree to make a fixed payment for a long time,” Georgiev said.
Should I refinance a credit card or consolidate debt?
Refinancing with a credit card is probably your best bet if you only have a few thousand dollars on your cards – or if those cards come with particularly low rates. You’ll also want to make sure you’re in control of your spending habits, as 0% promotion times can be quite tempting.
Use Credible to determine if a 0% balance transfer or credit card makes more sense for your financial situation. Credible makes it easy to compare options.
“You also need to avoid getting into more debt,” Georgiev said. “Yes, your old credit card is now at zero, so you might feel like you have a lot of leeway, but you don’t. The goal here is to have less debt, at a cheaper rate, no more, on more cards. “
To qualify for these cards, you will generally need a credit score of 700 or higher. You also need to run the numbers and make sure your savings outweigh the transfer fees associated with the card.
Consolidating your debt can be smart if you have a wide range of debts and large amounts. You will need to make sure you have a stable income as these require regular monthly payments for many years.
Make sure you use a personal loan calculator to figure out what your monthly payment might look like, and if you’re not sure you have the income to pay this consistently, then steer clear. You can also use Credible’s free online tools to see what type of personal loan rate you qualify for. Simply enter your desired loan amount and other simple information to view your options.
“Consolidation loans don’t freeze credit accounts, which means consumers with a problem can quickly get into debt again,” Dvorkin said. “Consumers hoping to use this debt tool should also consider the cost of a consolidation loan. If they can’t afford loan repayments, loan setup fees, or interest charges, consolidation probably isn’t for them.
WHAT APR MEANS ON YOUR CREDIT CARDS AND LOANS
The bottom line
Credit card refinancing and debt consolidation can be good options if you are dealing with credit card debt. To determine which is the best route for you, be sure to visit an online marketplace like Credible to see what 0% credit card options you might be eligible for. The rates of personal debt consolidation loans are also available.
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