Credit Card Refinancing vs. Debt Consolidation

The average American is carrying $5,313 of credit card debt in their wallet.^[1] And because the average credit card has an interest rate that ranges from 15% – 25%, that debt can balloon over time.^[2] 

If you’re looking for ways to pay off your high-interest credit card debt, consider taking advantage of these popular methods: 

• Debt consolidation: Bundle (aka consolidate) multiple credit card balances into a single debt with a single monthly payment using a personal loan. 
• Credit card refinancing: Transfer debt from other credit cards to a balance transfer credit card with an introductory low or 0% interest rate. 

Both methods are effective – but each comes with pros and cons. To choose the method that’s right for you, you’ll need to know how each one works.

Debt Consolidation With a Personal Loan

With this method, you take out a loan – usually a personal loan – and use it to consolidate and pay off or pay down your credit card balances.

You can get a personal loan from a bank, credit union or online lender. 

A personal loan (which is a type of installment loan) is a lump sum of money you borrow at a fixed or variable interest rate and agree to repay every month for 1 – 5 years. Or in lender-speak, 12 – 60 months. 

Personal loans can be as big (or as small) as you need them to be, ranging from $1,000 – $100,000. The amount you’re qualified to borrow and the interest rate you’re offered will vary by lender. Your credit score, income and credit history will also play a big role in shaping lender offers. 

Before you sign on the dotted line, consider the pros and cons of personal loans.

Pros

• Lower interest rates: If you have good credit (more on that in a second), personal loans usually come with competitive interest rates that start at about 9%. That’s lower than most credit cards, which have interest rates starting around 14% – 17%.^[3]
• Lower monthly payment: You may be able to lower your monthly payments by consolidating your debt into a single payment at a lower interest rate. 
• Easier to manage: Juggling multiple credit card balances can be a time suck, not to mention your risk of missing a payment is a lot higher. When you consolidate, there’s only one bill to worry about each month.

Cons

• Need good credit to qualify: To qualify for a personal loan, you’ll need a good credit history and a credit score of at least 620. FYI, most lenders prefer a credit score of 670 or higher.^[4]
• Fees: Lenders typically charge an origination fee (read: what a lender charges to process a loan). It usually amounts to 1% – 5% of the loan amount. That money may be deducted from what you borrowed. Let’s say you borrowed $10,000 with a 5% origination fee. You’d get $9,500 from the lender, but you’d repay $10,000.
• Late fees: Pore over the fine print. Lenders may charge late fees or include a prepayment penalty clause in your contract. Prepayment charges are triggered when you pay a loan off early.
• Application process: To apply for a personal loan, a lender will need your financial info, like bank statements, pay stubs, W-2s, tax returns or other proof of income. 
• Length of time: You may be able to get the loan in 1 day once you’ve been approved but processing the loan may take 7 – 10 days.

Using Your Home To Consolidate Credit Card Debt

Personal loans are unsecured loans and don’t require collateral (aka personal property you give a lender to get a loan). 

If you own a home and have enough equity (the current value of your home minus the balance of your loan), you may qualify for a home equity loan or home equity line of credit (HELOC). 

Home equity loans and HELOCs are secured loans, and your home acts as the collateral. You’ll probably get a lower interest rate with these loans compared to a personal loan, but they may be harder to qualify for. The other con is that the application process for home equity loans and HELOCs is longer and far more involved.

Credit Card Refinancing

If you’ve got good credit, you’ve probably gotten lots of credit card balance transfer offers. 

Balance transfer offers have one job: to get you to sign up for a new credit card (or nudge you to transfer other balances to a card you already have).

One hallmark of balance transfer offers is the low or 0% introductory interest rate. These tempting but short-term rates usually last for 6 – 24 months. After the intro period, the interest rate spikes to the standard credit card interest rate, which can be anywhere from 15% – 25%.^[2]

If you use balance transfer offers strategically, they can be a savvy way to manage your credit card debt – but there are pros and cons to consider.

Pros

• Low interest rates: Paying 0% interest can save you a lot of money in the short term. Depending on your budget and debt-payoff plan, it may free up extra cash that you can use to pay off other higher-interest debt.
• Easy to apply: Applying for a balance transfer offer can be as simple as filling out an online application or talking to a customer service rep for a few minutes. There’s usually no paperwork required, and your balance transfer is usually processed in 5 – 7 business days.

Cons

• High credit score: Credit card companies usually offer balance transfer cards based on credit scores. To get an offer, you’ll need a credit score in the high 600s, we’re talking 670 or better, and a clean credit history.^[5] 
• Short-term offer: The low interest rates on balance transfer offers are here for a good time, but not a long time. If you have a balance after the intro rate expires, you’ll be facing higher interest rates on what’s left on the card.
• Low credit limit: Your credit limit is the maximum amount you can borrow on your card. With a new card, the limit probably won’t be more than $5,000 – $6,000.^[6] 
• No same-lender transfers: If you have a few credit cards issued by the same bank or credit card company, you probably won’t be able to transfer balances between those cards. 

When Do Refinancing and Consolidation Make Sense?

Refinancing and consolidation can help you manage debt and pay less in interest – but it doesn’t get rid of debt. 

TBH, when you factor in balance transfer fees and the other fees associated with loans, you’re adding on to your debt before you post your first payment.

This is why debt consolidation and credit card refinancing work best as part of a larger debt management plan. 

It’s about more than watching individual balances shrink. With a debt management plan, you’ll need to get organized and take a deep dive into your finances – and your spending. Then you’ll need to put that plan on paper, creating a sustainable budget that lets you live a little, pay down existing debt and avoid adding new debt.

Pro tip: Focus on paying down your highest-interest debt first. You’ll pay less in interest, and you can use the money you saved not paying interest on other bills. 

Is Refinancing or Consolidating Credit Card Debt Right for You?

To answer that question, start by asking yourself these questions:

• How much credit card debt do I have?
• How much can I commit to paying down credit card debt each month?
• How quickly can I pay down my balance? (You’ll need the answer to the second question to figure this out.)

Let’s see what credit card refinancing and debt consolidation would look like if you had $24,000 in debt across multiple cards.

Credit card refinancing

If you can pay $1,000 a month, you might be better off going with credit card refinancing. You would pay less in interest during the introductory rate period. 

Just make sure that the bulk of the balance gets paid off before the balance transfer offer ends. (Remember: these offers usually last 12 – 24 months.)

Debt consolidation

If you can pay $500 a month, you may be better off with a debt consolidation loan. Why? You could lower your interest rate by stretching out your payments – paying off your loan in about 5 years. 

You’d pay more in interest, but paying your debt would become more manageable. If you can pay more at some point, put that extra cash toward your loan and pay it down faster. Just try and avoid triggering fees if your loan comes with a prepayment penalty clause.

Refinancing or Consolidation: Don’t Do It Alone

Whichever option you choose, make sure that it’s part of a larger plan to get out of debt. 

If your debt has you feeling overwhelmed, don’t be afraid to ask for help. Considering reaching out to a credit counseling service. A counselor can help you to create a budget and get your finances organized. They may even be able to help you negotiate a repayment plan with your credit card companies.

Point is, you’re not alone.  No matter your debt or financial situation, there’s a debt management plan or strategy that can help.