Credit Card Refinancing vs. Debt Consolidation
Summary
Learn the key differences between credit card refinancing and debt consolidation to find the best solution to lower your high interest rates and manage your debt.
In this article:
If you’re dealing with high-interest debt, debt consolidation options like credit card refinancing or debt consolidation loans may be on your radar. Both strategies can help you streamline the payoff process and potentially save you some money on interest. Below, we’ll dive deeper into the difference between credit card refinancing and debt consolidation loans, so you can decide on the strategy that will work for you to repay your debt.
What is credit card refinancing?
Credit card refinancing is the process of transferring your existing debt to a credit card, typically with a lower interest rate. If you qualify for a lower interest rate than those you’re currently paying, you may be able to reduce your monthly payment, minimize your interest charges and pay off your debt sooner.
How does credit card refinancing work?
You typically refinance credit cards with a credit card that offers a low or 0% introductory or promotional annual percentage rate (APR) on balance transfers. The offer period usually lasts around 12 to 21 months, so you’ll owe little to no interest if you repay your transferred balance before the offer period ends.2
You apply for a credit card with an introductory offer APR on balance transfers the same way you would for any other credit card. Once your application is approved, you’ll contact the credit card company to begin the transfer process. After your old debts are paid off, you can begin making payments on your new card at the lower interest rate.3
Remember that when the low introductory rate expires, any balance you have left will start to accrue interest at the non-promotional rate.4 A balance transfer typically also comes with a balance transfer fee, which is either a flat fee or around 3% to 5% of the transferred amount.5 It’s also important to note that you typically can’t transfer a credit card balance to another credit card with the same issuer.6 So, you’ll want to shop around to see if you qualify with another credit card company.
What is debt consolidation?
Debt consolidation is a way to simplify your finances by turning multiple debts into one single payment by using a new loan or credit card.1 As described above, credit card refinancing is one type of debt consolidation. A debt consolidation loan is another, which involves taking out a personal loan to repay existing debts.
How do debt consolidation loans work?
A debt consolidation loan is a type of personal loan, which is a lump sum of money you can borrow from a lender, bank or credit union to use for a variety of purposes, including refinancing your credit card debt. Loan approval will depend on several factors, like your credit history, income and loan amount.7
With a debt consolidation loan, you roll multiple bills into one balance, giving you a single fixed monthly payment and a fixed interest rate. A debt consolidation loan also has a set term, so you’ll know exactly when you’ll pay it off — as long as you make payments on time, every time.
You can apply for a debt consolidation loan in person or online with a lender like OneMain. While other lenders may have different ways of evaluating applicants, OneMain works with a wide range of credit scores and takes your whole financial picture into account to help you find a loan that’s right for you. It’s also important to note that your credit score may take a slight temporary dip when you apply, as it typically does with a hard inquiry, and lenders use that score to assess your creditworthiness.
If you’re approved for the loan, you’ll receive the funds to repay each of your debt balances and then pay back your loan through fixed monthly payments. It’s important to note that refinancing or consolidating your current debt may result in higher total finance charges if the new interest rate is higher, or the loan term is longer. Some loans may also have an origination fee — a fee for processing the loan application — that is subtracted from your loan amount.
Credit card refinancing vs. debt consolidation: Which is right for you?
Choosing the right debt payoff method depends on what your budget can handle and what type of debt you have.
Credit card refinancing may work if you:
- Qualify for a 0% introductory or promotional APR: You typically need strong credit to qualify for a low promotional APR offer on a credit card.
- Can pay off your debt before the promotional period ends: Once the promotional period ends, you’ll be charged the card’s regular APR on any outstanding balance. Interest charges can add up quickly, potentially offsetting the money you saved by refinancing.
- Won’t be tempted to make new purchases: You can generally use the credit card where you transferred your balance for other purchases. However, the low promotional APR may not apply, and you may find yourself in more debt if you’re not able to repay the new charges.
A debt consolidation loan may work if you:
- Qualify for a personal loan with a lower interest rate than your existing debt: If you qualify for a lower interest rate than the ones you’re paying on your existing debt, you could save money on interest, depending on the length of the term.
- Need more time to pay off your debt: You may be able to find a debt consolidation loan with a longer term than a credit card’s promotional APR period. For instance, OneMain offers debt consolidation loans with terms between 24 and 60 months.
- Want fixed monthly payments: With a fixed interest rate and set monthly payments, you’ll pay the same amount each month on a debt consolidation loan.
Take control of your debt journey
Credit card refinancing and debt consolidation loans can both offer a path to becoming debt-free. Whether it's refinancing to ease the weight of high interest rates or consolidating to bring scattered debts under one roof, the best option is the one that aligns with your needs and goals.
Sources:
1 https://www.debt.org/consolidation/vs-refinancing/
2, 4, 5, 6 https://www.bankrate.com/credit-cards/zero-interest/zero-percent-intro-apr-guide/#balance-transfer
3 https://www.experian.com/blogs/ask-experian/how-to-do-a-balance-transfer/
7 https://www.bankrate.com/loans/personal-loans/how-to-get-personal-loan/#three
This article is for general education and informational purposes, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any purpose and is not intended to be and does not constitute financial, legal, tax, or any other advice. Parties (other than sponsored partners of OneMain Financial (OMF)) referenced in the article are not sponsors of, do not endorse, and are not otherwise affiliated with OMF.
