Credit Cards

What Is Credit Card Refinancing vs. Debt Consolidation

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Both choices are plausible. Making progress on several debts at the same time might be overwhelming. There are a number of minimum payments, interest rates, and monthly payment deadlines to keep track of. There is a sense of hopelessness in trying to accomplish it all while still making progress on paying down the principal.

As one of the 844 billion Americans with credit card debt, there are resources available to assist manage your situation and learn how to pay it off. Consolidating debt and refinancing your credit cards are two options that are closely connected and might assist you in getting your finances back on track.

Debt consolidation or credit card refinancing? Here’s everything you need to know to make an informed decision for your budget.

Debt consolidation vs. credit card refinancing: The Differences Between the two

Credit card refinancing is a form of debt consolidation, and it’s vital to know that. Difficulty repaying a portion or all of your debt might be alleviated with a debt consolidation approach.

With credit card refinancing, you may use a reduced rate debt consolidation loan or balance transfer to pay off your high-interest credit cards. Lowering your interest payments will let you to focus on paying down the principle faster, which is the ultimate aim.

One of the most typical ways to consolidate debt is to hire a third party to organize your debt in a way that makes it easier for you to pay. With a third-party debt consolidation program, you usually obtain a personalized debt repayment plan and make one monthly payment. Then, the organization takes charge of ensuring that your creditors are paid.

The vast majority of credit card refinances need you to fulfill credit and income requirements, and it’s something you’ll have to manage on your own. Consolidation loan programs that accept people with less-than-perfect credit histories and help them through their financial transitions are also an option. Look at your position and evaluate your options to see which course is best for you and your financial condition.

What are your alternatives when it comes to refinancing a credit card?

If you want to keep existing credit accounts and fulfill the requirements for a new loan, credit card refinancing is an excellent option. Refinancing your credit card debt may be an option for you to examine.

  1. Unsecured Personal loans

You can receive an unsecured personal loan from a third party using this strategy. Afterwards, you can use the money to pay off your credit card debts.. Personal loans often have lower interest rates than credit cards, making them an excellent choice for debt consolidation because of the reduced interest rate.

  1. Balance transfer at 0% annual percentage rate

Refinancing credit cards by opening a new account and transferring your high-rate debt to the new card is a common practice. Some of the greatest introductory APRs for balance transfer cards are between 12 and 18 months long. The full payment can be applied to the principle, rather than paying hefty interest as part of your monthly payment. If you’re not able to pay off your debt before the intro period is through, you’ll be subject to the standard variable interest rate.

  1. Specialized credit card debt services

It is the specialty of Tally to assist consumers in managing their credit card debt. As well as providing a low-interest line of credit that can be used to consolidate your existing debt, Tally also helps you streamline and prioritize your monthly payments. Tally handles all of your monthly credit card payments for you, so you just have to pay them once a month. If you’re drowning in debt and need some help getting your financial house in order, this is an excellent choice for you.

Pros and Cons

Pros

The interest rate is to be lowered. You may save a lot of money by avoiding the high interest rates associated with credit card debt by refinancing it. It is possible to save hundreds of dollars in interest costs by refinancing to a lower interest rate or even a zero percent interest rate.

  • A chance to get out of debt more quickly. It’s possible that you’ll be able to pay off your credit card debt sooner and save money on interest as a result. Having a lower interest rate means that more of your monthly payment goes toward lowering your loan debt. As a result, your debt-free status might be achieved sooner.
  • Improved payment tracking. Having all of your bills in one location might also be an advantage of consolidating your credit card debt. With credit card refinancing, you just have to keep track of one monthly payment instead of several. To avoid late fees and penalties, you may have fewer installments to keep track of, making it less likely that you’ll miss a payment.
  • Minimal impact on your credit rating. As long as you keep up with your new loan payments and avoid incurring additional credit card debt, your credit score is typically unaffected by credit card refinancing. Personal loans and debt transfers might have a tiny and temporary impact on your credit score, but it’s normally not a big deal.

Cons

  • Requirements in relation to one’s credit. A strong credit score is required for many of the finest 0% APR credit cards. A personal loan application for credit card refinance will also include a background check on your credit and an assessment of your income.
  • Limits on how much you can borrow or how much credit you can get. If you have a lot of debt, you may not be able to refinance all of your credit cards with the loan you acquire. A little personal loan may be all you can receive, or your credit limit on the 0% APR credit card may not be large enough to meet your needs. You may still be able to profit even if you are unable to refinance all of your credit card debt. It is possible that this can speed up the process of paying off your debt.
  • Fees. When applying for a personal loan, keep in mind that depending on the lender, you may be required to pay an origination fee. Also, keep in mind that a charge will almost certainly accompany your 0% APR balance transfer. Calculate your interest savings to see whether they’ll be enough to offset any expenses associated with a loan or debt transfer.
  • New customers. When you refinance your credit card debt, you’ll have to deal with the reality that you’ll have to keep your accounts open. With a fresh loan, the temptation to spend on your freed-up credit cards is tremendous. If you don’t get to the bottom of the problem and stop spending, you may wind yourself in more debt than you started with.

Debt consolidation: What are your options?

Debt consolidation may be a better option for certain people who are weighing the pros and downsides of credit card refinancing versus debt consolidation. Using a third-party debt consolidation firm might make sense in some situations.

  1. Debt management

Credit counselors and debt management companies collect your personal information. Then, they devise a bespoke debt management plan, in which you submit a single monthly payment to the firm, which divides it among your creditors. The organization may be able to work out a better deal with your creditors to save you money.

  1. Debt settlement

In certain cases, third-party debt consolidation firms are genuinely engaged in debt settlement. You no longer pay your creditors and instead pay the debt settlement business. They deal with your creditors on your behalf and arrange a settlement based on the monthly payments you make. If you’re trying to get a fresh start with your money, chances are you’ll run into one or both of these two types of debt consolidation firms.

Pros and Cons of Debt Consolidation

Pros

  • In-depth strategy for success. Debt consolidation might be made easier with the help of a third party. Professional credit counselors and debt consolidation companies can assist you in reducing your debt. Ideally, you will be debt-free and have developed new financial habits that will help you avoid debt in the future when the program is through.
  • Deleted off your list of things to accomplish. These debt reduction options might save you money as well as simplify your monthly payments. There is only one monthly payment you must make, and the debt management company will handle the rest. You may be relieved to no longer have to deal with your debt, whether they pay it off as planned or negotiate a settlement.

Cons

  • Fees. Any third-party debt consolidation and management strategy you choose will almost certainly cost you money. In certain circumstances, paying the charge is still less expensive than letting your finances spiral out of control for years on end. Just be aware of the price tag ahead of time.
  • Your credit score will be affected. Debt management programs might have a negative influence on your credit score. There may be no influence on your credit rating if the program is designed to help you better manage your monthly payments, and the loan business just pays your bills for you.

Debt settlement, on the other hand, may result in a significant decline in your credit score. If you stop paying your obligations, your creditors are more likely than not to accept a lower settlement in the hopes of recouping some of their losses.

Bottom Line

Credit card refinancing or third-party debt consolidation or settlement services may not be the ideal solution for you if your financial situation is not clear. Consider the following: What’s your credit score like? How much debt do you now have? Credit card refinancing is a better option if you have decent to exceptional credit but wish you had less debt. Working with a debt management agency, on the other hand, may be beneficial if you’re in a tight spot financially.

There is no one-size-fits-all solution when it comes to improving your financial condition and avoiding a repeat of your current predicament. Choose a strategy that will help you achieve your goals as fast as possible while causing the least amount of harm to your existing position as you see fit.

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