Credit cards allow quick and easy financing to help you pay for necessities and spread the burden of more expensive purchases over several months. All that convenience, however, can come at a price. It’s often far too easy to borrow more than you can easily repay.
Credit card refinancing and debt consolidation both offer popular ways to manage high or unsustainable credit card debt. We take a look at how each option works and why one or the other might be better for helping you escape a credit card debt trap.
Taking Charge: Refinancing vs. Consolidation
If you’re struggling to keep up with snowballing credit card debt or juggling balances on two or more cards to make your monthly payments, it’s time to take action.
Failing to take it seriously can saddle you with long-term debt and prevent you from reaching your financial dreams. Any plan to manage your debt better starts with a budget and a commitment to stick to it. However, you also need a manageable plan to pay back what you already owe.
For most people, this involves choosing between credit card refinancing and consolidating your debt. Let’s examine each of these options in turn and consider which might be best for you.
What Is Credit Card Refinancing?
Credit card refinancing involves moving balances you have accumulated on one or more existing credit cards to a new card with a lower interest rate or other features that make it easier to pay off your existing balance.
The high-interest rate charged by most credit cards means balances can grow quickly, especially if you only make minimum monthly payments on your accounts. And, because those rates are variable, your monthly payments can increase rapidly if market interest rates rise.
This makes it easy to get caught off guard by credit card payments. If you find you are paying more than you can easily afford or need to use one card to pay off balances on the other, then credit card refinancing can offer a timely way to get your debt under control.
How Does It Work?
Credit card refinancing involves opening a card with a lower annual percentage rate (APR) than your existing cards and using this card to pay off what you owe on those original cards. Ideally, you’ll pay less each month and you will only have one bill to monitor, manage, and pay.
You’ll use your new card to pay off your card debts by carrying out an existing balance transfer. Almost all cards allow you to transfer balances, but when choosing a card for your refinancing be sure that:
- The spending limit on your new card is high enough to allow you to transfer your existing debt
- The card does not charge excessive fees for each transfer
In fact, many “balance transfer” cards offer features that make it easier to move balances to your new card, especially during the “introductory” few months after you open your account. Look especially for cards that offer special introductory period perks including:
- No charge on balance transfers
- No interest on your balance (0% APR)
- Cash, or other rewards, for charging a certain amount to the card in this period
You can carry out your balance transfers by contacting the card’s issuer and providing the details of the cards you want to move money from. Used wisely, a balance transfer card can help you reduce or possibly even pay off your debt in the first few months that you have it.
Refinancing your credit card in this way can make your payments more manageable and put you on the path to paying off your debt, but only if you consistently lower your balance by paying the full amount due each month.
Pros and Cons of Credit Card Refinancing
Credit card refinancing offers advantages and some potential drawbacks as a way to manage and ultimately pay off credit card debt. Significant benefits of credit card financing include:
- Replacing multiple debts with a single monthly payment
- A lower interest rate on your card payments
- 0% APR during your card’s introductory period
- Cash or other rewards for using your card during the introductory period
- An improved credit score due to a higher debt-to-borrowing ratio
At the same time, some potential disadvantages of credit card refinancing include:
- Limited introductory periods (usually 6-21 months)
- Potentially high balance transfer fees
- Interest rates remain relatively high
- Difficulty finding a lower APR if your credit is poor
- The risk that you will simply continue charging new purchases to your cards while making only minimum payments
What Is Debt Consolidation?
Debt consolidation involves taking out a single personal loan and using it to pay off several outstanding credit card debts. By replacing credit card balances with one, predictable monthly payment you are also making your budgeting every month a little easier.
Debt consolidation is a long-term solution to excessive credit card debt. To make it work, you must be willing to live within your means and make consistent payments on your loan, possibly for many years to come.
How Does It Work?
Debt consolidation replaces the variable rates and consistently accumulating balances of your credit cards with a single monthly bill.
Unlike a credit card, a personal or debt consolidation loan is not revolving credit. You will not be able to charge more money to your account balance and you will need to pay the full amount due on your loan payment every month.
In most cases, the loan you take out to pay off your outstanding credit card balances will have a significantly lower rate than your credit cards. You will still pay a significant amount in interest charges over the term of your loan but your monthly payment will be more manageable.
The real benefit that debt consolidation brings is predictability and certainty. By knowing what you owe, when you need to pay it each month, and how long you will need to make payments, you can make plans for your future and begin saving toward other financial goals.
Taking out a personal loan is relatively straightforward. In most cases, you require no collateral (a fixed asset the lender can seize if you fail to repay your loan) and you receive the full lump sum you borrow into your checking account almost immediately.
This money is used to pay off the entire amount outstanding on all your cards, so you are free of high-interest variable rate debt. The fixed rate on your personal loan means your payments will stay the same until the loan is paid off, even if rates increase.
If your credit score is low, you might struggle to qualify for a personal loan or access the best interest rate on the money you borrow. However, even paying off a relatively high rate over time is more effective than continuing to juggle ever-increasing minimum payments on your cards.
Pros and Cons of Debt Consolidation
Consolidation offers significant advantages as a way out of unmanageable debt, but also comes with some drawbacks, especially if you are used to spending freely. Important advantages of debt consolidation using a personal loan include:
- You make a single, predictable monthly payment
- Your interest rate and monthly payment are fixed
- You save money on interest payments over time
- You can begin to budget effectively and plan for other priorities
- Your credit score will improve as you reduce high-interest debt
Debt consolidation also comes with some disadvantages, especially if you are not comfortable with a long-term financial commitment. Some important potential drawbacks include:
- You need to make full loan payments every month
- You may have to pay off your loan over several years
- You will still pay significant interest, but over a longer period
- A poor credit score may make it hard to qualify for a loan or access a good rate
- There is nothing to stop you from running up further credit card debt
The following table summarizes the key differences between credit card refinancing and debt consolidation.
|Credit Card Refinancing
|Manage debt by reducing card balances and lowering APR
|Consolidate and pay off credit card debt
|Lower than credit card rates, especially for balance transfer promotions
|Lower than credit card rates, depending on market and credit score
|Varies, based on interest rate, balance, and repayment terms
|Fixed monthly payment for the loan duration
|Open-ended. Balance transfer promotions from 6-21 months
|Typically ranges from 1 to 7 years, depending on the loan terms
|Balance transfer fees may apply
|Origination fees may apply
|May lower credit score due to opening a new credit account
|May boost score by improving credit utilization and credit mix
Refinance or Consolidate: What’s Right for You?
Refinancing your credit cards and consolidating debt into a personal loan are both effective ways to manage credit card debt. However, they are also both significantly different approaches to debt that work best in different situations.
Let’s take a closer look at what sets these approaches to credit card debt apart and how this affects where they are best used.
Credit Card Refinancing
Choosing to refinance your debt by moving it to a lower-rate balance transfer card signals an intention to lower your overall credit card debt by reducing what you pay in interest charges. However, it also suggests that you plan to continue to use your credit card in the future and that while your credit card debt may be high, you consider it to be sustainable.
Refinancing your debt is more about saving money on interest and taking advantage of perks for transferring balances.
With this in mind, it’s best to think of credit refinancing as a shorter-term strategy to reduce and manage your credit card debt rather than eliminate it. It’s a good strategy if:
- You have stable employment with good prospects
- You have a workable monthly budget
- You are able to make more than minimum payments if necessary
- You plan to continue to use your card but want to save money on interest payments
Debt consolidation involves a more serious commitment to eliminating credit card debt altogether. Choosing to turn the flexibility of short-term, high-interest revolving debt into a longer-term fixed loan signals a willingness to change your financial outlook for good.
Debt consolidation makes the most sense if you believe your credit card debt is unsustainable and poses a threat to your long-term financial future. It’s a good strategy if:
- If you are struggling to make minimum payments on one or more cards
- You are willing to stop using your credit cards, at least for now
- You want to build better financial habits
- You want to plan for your long-term financial future
Debt consolidation is a proven route out of unmanageable credit card debt. It works well when it’s part of a wider commitment to financial responsibility, including making and keeping a budget and controlling your spending.
Build a Better Future With Jeanne D’Arc Credit Union
Debt consolidation is a deep commitment to a better financial future. Still not sure what’s right for you? Through a partnership with GreenPath Financial Wellness, Jeanne D’Arc members can receive Debt Management Counseling Services where an experienced financial coach is available to help guide your decision so you can tackle your debt with confidence. By taking responsibility for your credit card debt today, you are building a solid foundation for future financial success.
At Jeanne D’Arc Credit Union, we offer our members simple, affordable, personal loans to reach their financial goals. If you’re looking to build long-term security for your family, cover education needs, or make a dream wedding or vacation a reality, our personal and debt consolidation loans will help you pay for it responsibly.
Our secured and unsecured personal loans offer:
- Lump sum borrowing of up to $15,000
- Terms of 1-5 years
- No application fees
- No prepayment penalties
- Skip-a-Payment program for when money is tight
Taking charge of your debt today allows you to start saving for a more secure tomorrow. Contact Jean D’Arc today to learn how we can help, or click below to find out more about our debt consolidation loans.