Credit card refinancing or debt consolidation may be good options if you have a lot of debt and need help paying it off. Both options can make it easier to manage your monthly payments and, ultimately, end up debt-free. Done right, credit card refinancing or debt consolidation may also result in you paying less money over time.
Credit card refinancing involves paying off a credit card by transferring the balance to a new card with a lower interest rate. The most common way to do this is by taking advantage of 0% interest balance transfer credit cards. If you can transfer your credit card bills and pay off the full amount in a year or less, this is the ideal option for you.
Credit card consolidation refers to paying off multiple debts with a single lower-interest loan, usually a debt consolidation loan or personal loan. Unlike refinancing, the main purpose of consolidation is to simplify bills by combining multiple credit card payments into one fixed loan payment.
Although both options have the same goal, there are some important differences. That’s why, before choosing one over the other, it’s important to weigh both options.
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Credit Card Refinancing vs. Debt Consolidation
| Credit card refinancing | Debt consolidation |
| Transfers a single debt into a new loan with a lower interest rate | Rolls multiple debts into a single loan |
| Primarily uses a balance transfer credit card with a 0% APR offer | Uses a personal loan or debt consolidation loan |
| Charges balance transfer fee of 3% to 5% | May have a loan origination fee or application fee |
| Minimum credit score: About 680 | Minimum credit score: About 550 |
| Hard credit check (so your credit score may fall) | Hard credit check (so your credit score may fall) |
| Limited repayment term (usually 12-18 months) | Longer repayment term (up to seven years) |
| Fixed interest rate of 0% until the introductory period ends, then rate becomes variable | Fixed interest rate for the life of your loan |
| Requires discipline to control your spending issues | Requires discipline to control your spending issues |
| The bottom line: This will only help if you can pay off your debt – or consolidate it – by the time your introductory term ends | The bottom line: If you have several debts and are struggling to make all of the minimum payments, this is a good option |
Pro tip: It’s important to note that neither of these options will work in the long run if you continue a pattern of overspending. If you don’t have the discipline to pack away those credit cards that have been paid off (either with the balance transfer credit card or the debt consolidation loan), you could end up worse off than you are now. If you think this will be a problem, it may be best to consult a professional credit counselor or debt consolidation company.
How Credit Card Refinancing Works
Credit card refinancing is taking an existing credit card debt with a high interest rate and transferring it to another credit card. It usually requires you to open a new line of credit. In some cases, you may instead have to take out a personal loan.
The new credit card is known as a balance transfer credit card. A balance transfer credit card can be very beneficial when used correctly. Before applying for one, make sure it has the following:
- No annual fee
- Long introductory period (6 to 24 months) with low or 0% APR (annual percentage rate)
- $0 or low balance transfer fee
Not all credit cards come with the option for a balance transfer. Among those that do, not all have good terms or rates.
Credit card refinancing with a balance transfer card is a fairly simple process. To do it, simply apply for the card. Once approved, transfer the balance from another high-interest credit card to the new one. Then, make monthly payments on the new card until the balance is paid in full.
READ MORE: Best balance transfer credit cards
What are the Pros and Cons of Refinancing?
As with anything else, there are both pros and cons to credit card refinancing. Here’s what you need to know.
Pros
- The average 0% APR introductory period on balance transfer credit cards is 13 months.
- Balance transfers let you lock in a lower interest rate than that offered by most major credit cards.
- If you pay off the balance before the introductory period ends, you can save a lot of money in interest.
- It’s relatively easy to apply for a balance transfer card.
- There’s usually a quick turnaround time (a couple of days) from the application date to card activation.
- Most credit card issuers offer a prequalification option that won’t impact your credit.
- If the credit card limit is high enough, you could transfer all existing credit card debt at once.
- Personal loans for credit card refinancing often have higher limits than traditional balance transfer cards.
- Some lenders may let you use it to refinance other consumer debts like high-interest auto loans.
- The new monthly payment after credit card refinancing is typically much lower than before. The lower minimum payment should help ease your budget crunch.
- Credit card refinancing will save you money
Cons
- Credit card refinancing requires a high credit score (670+) to qualify.
- The debt you can transfer depends on the new card’s credit limit.
- Balance transfer fees typically range from 3% to 5% of the amount transferred.
- You’ll need to complete the balance transfer within a certain period (usually 60 days) for the most benefits.
- Late payments could result in a penalty, and you could lose the 0% introductory rate.
- Credit card refinancing usually only covers one debt at a time
- Applying for a balance transfer credit card means a hard inquiry, temporarily impacting your credit score.
- It’s not usually possible to transfer balances between cards issued by the same lender.
- The 0% APR expires after a certain point (usually 12 to 18 months).
- If there’s still a balance after the introductory period, you’ll owe interest on the new card.
How Debt Consolidation Works
With credit card debt consolidation, you can combine multiple high-interest debts into a single, low-interest monthly payment. This method requires you to take out either a personal or debt consolidation loan. The new loan should have a much lower rate than the original debt. That way, you’ll be able to pay it off more easily — and perhaps more quickly.
Unlike credit card refinancing, debt consolidation won’t rely as heavily on your current credit score. In fact, some lenders offer loans to borrowers with bad or fair credit. Some of the best lenders for credit card debt consolidation for bad credit are SoFi, Best Egg, and Upgrade. Check out our other recommendations here.
To get started with credit card debt consolidation, first figure out To get started with credit card debt consolidation, first figure out how much debt you need to combine (there’s a good calculator here), then figure out your ideal loan amount. Then, find a lender and apply for a debt consolidation loan for that amount. Once approved, you can consolidate the debt and start paying off the new loan as usual.
What are the Pros and Cons of Consolidation?
Just like with credit card refinancing, there are some things to consider before consolidating your credit card debt.
Pros
- Debt consolidation loans usually have a fixed interest rate lower than the interest rate on the debts before consolidation.
- It requires a single, fixed monthly payment and your loan payments will have a consistent due date.
- Some lenders offer a little more flexibility or customization in their payment plans (i.e., payment due date).
- It’s easier to manage one loan than it is to manage multiple debts with different minimums and due dates.
- You can merge multiple debts rather than just one.
- Debt consolidation can be used for different forms of debt, including credit cards, auto, medical, and personal loans.
- The new loan typically has a 3- to 5-year repayment period.
- Credit card debt consolidation puts less emphasis on credit score (i.e., more options for low-credit borrowers).
- A personal loan for debt consolidation does not require the borrower to put up collateral.
- It could potentially save you hundreds or thousands of dollars in interest.
Cons
- Credit card debt consolidation is mainly beneficial if you have multiple high-interest debts.
- It won’t resolve all your financial problems on its own.
- The fees (interest, balance transfer, annual, late payments, origination, etc.) can add up.
- A poor credit score will not qualify you for the best loan rates (ex., 540 credit score may mean higher interest).
- One late payment on the loan can stay on your credit report for up to 7 years.
- It takes time to set up a debt consolidation loan (up to 60 days).
- Applying for any new loan product will temporarily damage your credit score.
- Your loan options will be somewhat limited if you have poor credit, and you won’t qualify for the lowest rates.
Are you still confused about debt consolidation? Watch this to learn more:
Balance Transfer Credit Cards Aren’t Always the Best Option
Though paying no interest sounds ideal, balance transfer credit cards can sometimes be the wrong choice.
For example, if you have five $3,000 loans and transfer them to a 0% card with a fee of 5% per transfer, and pay them in full over 21 months (the length of the introductory period) with current monthly minimum payments totaling $273 and $750 in transfer fees, you’ll have to pay $750 per month to pay off the entire balance during the introductory period. If you can manage those payments, that’s a very inexpensive way to tackle your debt.
If you continue to pay the same $275 per month you were already paying and keep paying once the introductory rate expires, it will take you 363 months to pay off your debt. You will pay $10,467 in interest.
However, if you take out a debt consolidation loan for $15,000 at 15% APR and pay $275 per month, it will take 63 months to pay off the debt and you’ll pay a total of $6,730 in interest.
If you reduce your monthly payments to $200 to build in some budget flex, it will take eight years and you’ll pay $9,596.87 to pay off the debt.
Pro tip: If you can’t pay the balance in full during the introductory period, the best option would be to transfer everything onto a balance transfer credit card for 18 months then use a personal loan to pay the remaining $10,700 left when the offer is about to expire. At that point, if you transfer the remaining balance to a personal loan with a 15% APR, it will take another 45 months to pay off and you’ll pay $3,335.26 in interest.
More Options for Credit Card Debt Consolidation
Here are some of the best options to consider for consolidating and managing credit card debt:
- Home equity loans
- Debt settlement companies
- Debt Management Plans (DMPs)
- Borrowing from friends or family
- Peer-to-peer loans for bad credit borrowers
Which Is Best For You?
Before choosing to consolidate or refinance credit card debt, ask yourself:
- Are you looking to lower the interest rate or stretch the repayment term on one larger loan, or do you have multiple debts to roll into one loan?
- How long will it take to pay off these debts without interest? How long will it take if there’s some interest but a longer repayment period?
- What’s your current credit score? Will you qualify for the best rates to make it worthwhile?
- Do you own any other assets, like a home, that I can use to refinance or consolidate debt?
With both options, the goal is to reduce how much you pay monthly to make the debt more affordable. Both options will also give you a better chance of becoming debt-free in the future. But how you do this varies quite a bit based on timing and credit score.
| When to choose credit card refinancing | When to choose debt consolidation |
| You have one large debt to deal with and your credit score is 670+ | You need to roll multiple debts into one larger loan |
| You’ll be able to pay off what you owe during the 0% introductory APR period, so there’s no interest | There’s a low chance of you paying off the entire balance within a credit card’s introductory APR period |
| You qualify for a high enough credit limit that lets you roll all your debts into the new credit card | Other assets (like home equity) and a good credit score will let you take out a second mortgage or HELOC |
| There’s basically no chance of you charging the new card with new purchases. Any new purchases could result in other fees or end the 0% interest period | You’ve already pre-qualified for a personal loan with a low interest rate and no annual fee |
| You’re disciplined enough to have access to a new credit card without running up more debt | It’ll be easier for you to pay off the debt due to the longer repayment plan and lower monthly payments. |
The Bottom Line
Ultimately, credit card refinancing and debt consolidation are both good options if you have a lot of high-interest debt. Both options could save you hundreds or even thousands of dollars overall. Whichever option you choose, make sure it fits with your financial situation and budget. That way, you can better handle your finances and keep from accruing more debt over time.
FAQs
This depends on the method of consolidation. With a conventional debt consolidation loan, you can combine different types of debts into one loan. These debts include things like student loans, medical debt, and credit card debt. Certain debt consolidation methods won’t let you consolidate certain types of debt. For instance, with a DMP, you can’t include student loans or auto loans in the plan.
A FICO score is a three-digit number ranging from 300 to 850. Potential lenders use it to determine how likely a person is to repay what they borrow. Several things influence your FICO score. This includes payment history, credit utilization, age of credit, hard inquiries, and diversity of accounts.
A 670+ FICO score is considered good or excellent credit. You’ll qualify for most loan products at the best rates in this range. A FICO score between 580 and 669 is considered fair. Fair credit usually makes it possible to qualify for middle-of-the-line loans and credit cards. Finally, a credit score below 580 is considered poor and will make it difficult to qualify for most financial products.
Consolidating student loans has its pros and cons. On the one hand, it can be easier to manage payments since consolidating them means making one monthly payment. It may also result in a lower interest rate and a lower minimum monthly payment. On the other hand, consolidating student loans could mean a longer repayment term. This means you’ll end up paying more in interest over time. Additionally, consolidating federal student loans may disqualify you from benefits like loan forgiveness or deferment.
This depends on how much you owe. Medical debt does not come with interest. So, in most cases, it’s better to set up a payment plan instead of consolidating it. However, if you have multiple medical bills and can’t keep up with them, consolidating them can make things easier. Plus, consolidating medical debt could mean lower monthly payments depending on how much you owe.