Many or all of the companies featured provide compensation to LendEDU. These commissions are how we maintain our free service for consumers. Compensation, along with hours of in-depth editorial research, determines where & how companies appear on our site.
Credit card debt is rising in the United States. Approximately 43 percent of Americans carry a revolving balance on their credit cards, with an average balance of $6,354, according to a study by Experian.
Getting rid of credit card debt can be a challenge, but there are ways to do it efficiently. Two popular options include transferring your balance to a credit card with a lower interest rate – known as credit card refinancing – and obtaining a debt consolidation loan.
Understanding the difference between credit card refinancing and debt consolidation can help you decide which is the best way to pay down your debt.
On this page:
Credit Card Refinancing
Credit card refinancing involves moving a credit card balance from one credit card to another card with a lower interest rate. A balance is typically transferred to a card that has an introductory interest rate of 0% for a certain length of time, such as 12 to 18 months.
Given that many credit cards have interest rates that can be as high as 15% to 20%, transferring a balance to a card with a low or 0% interest rate can save hundreds or thousands of dollars while you pay off your debt. It is a good way to lower your interest rate, but users should be careful when taking this option because the interest rate for the new credit card will shoot up after the introductory period.
The major advantage of credit card refinancing is that you can immediately get a low or 0% interest rate on your credit card debt. That allows you to immediately reduce your interest rate and save a substantial amount of money in interest payments.
Credit card balance transfers also tend to involve a quick online application process and receive a decision within minutes. Consumers can also make lower payments as they pay off their balance, if their financial circumstances change, or even have their credit line re-assessed as they pay off their debt.
However, there are drawbacks to using a balance transfer to pay off credit card debt. The biggest one is that the introductory interest rate is for a limited time only — usually no more than 18 months. After that, the interest rate will go up, and you will be in the same situation — with a high interest rate credit card. Because credit cards have variable interest rates, these changing interest rates actually put you further in debt..
In addition, credit card companies charge a balance transfer fee for credit card refinancing, which is usually 3 percent to 5 percent of the total balance transfer. If you transfer $10,000, the fee could be as much as $500, which adds to your debt. Finally, because your minimum monthly payment decreases as your balance drops, if you only make the minimum payment, you may never pay off the balance.
>> Read More: Credit card consolidation
A debt consolidation loan is a personal loan that can help borrowers reduce their debt and improve their credit by making regular monthly payments, often at a low, fixed interest rate.
Borrowers’ interest rates will be determined by a number of factors, including credit score and whether or not they put up collateral to secure the loan. Most debt consolidation loans are for terms of two to five years.
Borrowers can apply for a secured or unsecured personal loan ranging from $1,000 to as much as $50,000. If approved, the funds can be used to pay off credit card debt. Borrowers can then make fixed monthly payments on their personal loan until it is paid in full. While personal loans do have interest, the rates tend to be much lower than the interest rate for credit cards.
There are both advantages and disadvantages of using a personal loan to pay off credit card debt through debt consolidation. These should be seriously considered before deciding to take out a debt consolidation loan.
The primary advantages of a debt consolidation loan include having a fixed interest rate loan, likely with a far lower interest rate than what you would be paying for a credit card. In addition, the monthly payment would be fixed, so you would know exactly what you need to pay each month, making it easier to budget. These loans also have set lengths, so you know exactly when you will be finished paying off your debt.
However, there are disadvantages to debt consolidation loans. Most have origination fees, which are a percentage of the total amount borrowed, and require a more involved application process than simply applying for a new credit card. The fixed payment amount may also be a challenge for some borrowers, as it will stay the same even as you pay down your debt.
If you are considering consolidating your debt using a loan, it should be done only as part of a broader plan to eliminate debt and get your spending on track. Without an overall plan, it is entirely possible that you could sink further into debt by continuing to spend on your credit cards. A debt consolidation loan is often a good idea if the interest rate on a loan is lower than that of your credit cards. While you are paying off your debt consolidation loan, track your spending carefully and avoid impulse buys and unnecessary purchases. Use this time to learn more about finances, budgeting, and how to live within your means.
Credit Card Refinancing vs. Debt Consolidation: Which is Best for You?
If you have a relatively low level of credit card debt or are confident that you can pay off your debt before an introductory interest rate period expires, credit card refinancing might be the best choice for you. It will allow you to lower your interest rate immediately, and gain the benefits of paying no interest while you devote your extra cash to your debt.
However, if you are not sure if you can pay off your debt in full within 18 months or want to be sure that you pay off your credit cards entirely with the stability of a fixed monthly payment, a debt consolidation loan might be the better option. With fixed interest rates and a term of three to five years, you can plan your payments to get out of debt.
Author: Jeff Gitlen