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What is credit card refinancing vs debt consolidation

Reviewing the pros and cons of both options and what to keep in mind

by Nvindi
30 October, 2022
in Credit Card
What is credit card refinancing vs debt consolidation

Credit cards are one of the most widely used financial tools in the United States. They are one of those products we have incorporated into our daily lives and can no longer do without. Most people have one or more credit cards that they use daily. The use of credit cards generates, in turn, the obligation, month by month, to meet the expenses arranged on credit.

Eventually, all invoices reach their due date and, if unable to meet the billing, can generate really important problems. Two tools to avoid this situation are card refinancing or debt consolidation.

Contents

Toggle
  • What is a credit card refinance?
  • What is credit card debt consolidation?
  • To refinance or consolidate- which is better?

What is a credit card refinance?

Refinancing a credit card means trying to solve a credit card debt problem. Although, in some cases, credit card refinancing may be due to other situations, such as the need to extend credit.

Although there are different methods, the most widely used one is to access another credit card with 0% interest. This 0% interest will only be applied for an amount of time previously agreed with the card issuer.

What we do with this is transfer the high-interest debt to the 0% interest card. Thus, no interest will be charged on the debt during the refinancing period. Generally, these periods last between 12 to 18 months. Subsequently, the loan will be returned to the new card as agreed. Generally, the interest will be somewhat higher than average. Though the cheapest is usually about 15%, it can be as high as 20%.

An important thing to keep in mind is that in this type of operation, it is very likely that we will be charged a balance transfer fee from one card to another. This balance cost can vary, although generally it’s something in between 3% and 5% of the balance transferred.

Logically, this is a transaction in which your credit score is vital. Someone with a bad credit score will not be able to access a 0% interest promotion. Therefore, refinancing should always be done before any problems regarding defaults or claims occur. Keep in mind that defaults or complaints will result in a drop in your credit score.

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Refinancing is a convenient option when you have a good credit score, but, at the same time, you think that you may go through complications regarding your credit card.

What is credit card debt consolidation?

Consolidating credit card debt is another action you can take to avoid problems arising from non-payment or over-saturation of your credit card increase. It is different from refinancing. What is sought here is to obtain a loan with the lowest interest rates to be able to pay the high interest on the card. We can do that for the interest only or for the total debt, which is the most common.

There are different loan models you can go for. When it comes to low debts, a personal loan will probably be the fastest option. Although probably more expensive, since this type of loan requires a higher level of guarantee, so they are usually more costly. The advantage is that you will not have to use any tools other than your credit history and verifiable sources of income.

However, a personal loan may not be the best idea if we are dealing with a persistent and medium/high amount of debt. In this case, the lender will likely direct you to a home equity loan. For this type of loan, you will have to use your home as collateral for the amount requested to pay off the card debt.

Ideally, you should do the entire transaction with the same lender in this situation. In other words, consolidate the debt with the same entity that issued the card. That will greatly facilitate the process of overviewing the operation. Credit history is important here, too, although the presence of collateral can mean that the loan will be granted even with a relatively bad credit history.

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To refinance or consolidate- which is better?

These are two different operations. To say which is better or worse is complex as it will always depend on the individual’s circumstances.

In general, a refinance may be less expensive in the short term. Keep in mind that you will assume the debt by reducing the interest. This does not eliminate the cost of the debt, but it does make it cheaper. That may be the best option for someone with a relatively good financial situation and good future prospects.

However, debt consolidation allows you to reduce the debt to the maximum, eliminate the problem instantly and fragment the payments into other repayment terms. In other words, you could significantly reduce the monthly payment cost. That can be very convenient for someone going through a difficult situation without a guarantee of short-term improvement.

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