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Credit Card Refinancing vs Consolidation


Epic Loans Editorial Team

Credit card refinancing vs consolidation

Picture this: You are juggling several credit card bills and seeing your balances increase every month. If you find yourself in that situation, we can help you in this uphill battle. When it comes to financial solutions, people struggling with credit card debt frequently compare the benefits of credit card refinancing versus debt consolidation.

This blog seeks to explain the differences between these methods by examining the benefits and drawbacks of refinancing credit cards and shedding light on deciding between debt consolidation and refinancing cards.

What Is Credit Card Refinancing?

Refinancing your credit card means borrowing a personal loan to pay off what you owe on your cards. It simplifies matters by merging multiple payments into one loan, giving you a single monthly payment to pay off. If you are looking to lower your interest rate or ease your monthly payments, you should consider refinancing your debt.

It is essential to consider both the benefits and drawbacks of credit card refinancing before choosing strategies for yourself.

Pros

Interest rate reduction

If you refinance, you might be able to take on credit card debt with little to no interest for the first year. This is especially useful if you have balances you can pay off in a year.

Reduced monthly payments

Credit card refinancing often results in lower monthly payments. This will relieve some of the pressure on your budget by extending your payback period. But remember that a longer payback period will result in higher interest payments over time.

Combining multiple credit cards
By refinancing, you can combine several credit cards into a single loan. With this approach, debt management may become easier and more manageable in the long term.

Cons

Short-term low or 0% interest period
The low or 0% interest term normally lasts for a brief amount of time, usually between six and twenty-one months. Additionally, a balance transfer fee typically applies, which can range from 3% to 5%.

Incompatibility of savings and transfer fees
If they are unable to pay off the loan during the introductory period, many borrowers find that the transfer fee burden outweighs any possible interest savings. The interest rate could increase once this period finishes.

Additional costs
Charges like origination fees could be levied by some personal loan providers, raising the overall cost of the loan.

Absence of a structured repayment plan
Balance transfer cards do not set up a structured repayment plan that allows users to pay off their credit card debt in full. This creates the risk of you continuing to pay the minimal monthly amounts or even increasing your debt, which is common with revolving credit.

Requirements for credit score and credit building
To be eligible for a personal loan, you need to have adequate outstanding credit. Although some lenders provide loans with poor credit, the interest rates on these loans are typically higher than those on loans offered on good credit. You can improve your creditworthiness by regularly paying your bills on time and checking your credit report for errors.

Read More : Credit Card Debt Consolidation Mistakes to Avoid

Credit card refinancing vs consolidation

Credit Card Refinancing vs Debt Consolidation – Are They Different?

The idea behind debt consolidation and credit card refinancing is basically the same: you take out a personal loan to pay down your credit card debt.

However, the difference between debt consolidation and debt consolidation is primarily based on your goals. It is similar to other refinancing techniques, as the aim of credit card refinancing is to reduce interest rates and save money. Conversely, while debt consolidation does not always result in interest savings, it helps streamline matters by combining all of your credit card payments into a single payment.

Another important difference between credit card refinancing and debt consolidation is the method used: balance transfer credit cards with short-term 0% or low-interest rates are usually used in credit card refinancing. This implies that the maximum amount you can transfer is what you can afford to pay back in a year or so.

Choosing Between Credit Card Refinancing and Balance Transfer Cards

While using a balance transfer card and refinancing your credit cards may seem similar, they can bring about very different outcomes. With a debt transfer credit card, you are essentially paying off one or more of your current credit cards with a new credit card.

Choosing between a personal loan or a balance transfer depends on a number of factors, including your credit score, interest rates, and the amount of debt you owe. Generally speaking, credit card refinancing would be wise if:

  • You can obtain a reduced interest rate because of your stellar credit
  • You prefer a long-term payment schedule that is consistent and predictable
  • You want to combine your credit card amounts with other bills

However, balance transfer cards are better suited for you if:

  • You have comparatively small amounts due, or you are confident that you can pay off the whole amount before the introductory interest rate ends
  • You are prepared for a rise in the interest rate in the upcoming 12 to 24 months
  • You are interested in extra benefits that are linked to your payout, as several debt transfer cards come with travel miles and other rewards

Read More : How to Pay Off Credit Card Debt

Does Refinancing Credit Cards Hurt Your Credit?

Yes, refinancing your credit cards may have an adverse effect on your credit score. However, you can take precautions to minimize it.

Applying for a new credit card or loan results in a “hard inquiry,” which may cause your credit score to drop slightly. Even if one inquiry is not very concerning, applying for multiple credit cards quickly will lower your credit score. Therefore, it is a good idea to apply for just one card at a time and to research well before doing so.

Keep in mind that getting a new credit card might lower the average age of your accounts, which constitutes 10% of your credit score. Hence, consider keeping your previous credit card accounts open even after you have paid off the amounts owed to counter this.

Moreover, try to get a debt transfer card with a credit limit greater than what you require. For example, if you have a $2,000 debt, aim for a card with a $6,000 limit. This contributes to a low credit use rate, which affects 30% of your credit score. Thus, the rule of thumb is to use no more than 30% of your available credit.

Read More : Does Debt Consolidation Hurt Your Credit

Conclusion

Ultimately, the decision between credit card refinancing and consolidation depends on which approach best helps your financial circumstances. The secret to managing your credit card debt is knowing which option best suits your needs, whether you are looking for the ease of consolidation or the potential savings of refinancing.

If you are still determining which course of action is best for you, Epic Loans is ready to help with personalized assistance and debt management advice. Our network of experts and lenders is skilled at creating customized debt consolidation plans that meet your specific requirements. Make an appointment for a free consultation to discover the best solution that fits your budget, including credit card debt consolidation loans.

Frequently Asked Questions

What are the pros and cons of credit card refinancing?

Credit card refinancing helps with budgeting by providing longer payback terms and possible interest rate reductions along with reduced monthly payments. However, short-term low or 0% interest credit cards have additional costs, and balance transfer credit cards do not have set repayment schedules, so you run the danger of accruing more debt

What is the difference between credit card refinancing and debt consolidation?

Debt consolidation and credit card refinancing entail taking out a personal loan to pay off credit card debt. The true distinction lies in your financial objectives and the particular approach you choose to accomplish them.

When should you consider credit card refinancing?

Generally speaking, refinancing would be wise if:

  • You can obtain a reduced interest rate because of your good credit score
  • You prefer a long-term payment schedule that is consistent and predictable
  • You want to combine your credit card amounts with other bills