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If you are struggling to pay off consumer debt, credit card refinancing and debt consolidation are two common options that can help you get financial relief. Both involve transferring all your debt to another credit card or loan, ideally with a lower interest rate. However, there are a few key differences between credit card refinancing vs debt consolidation that you must consider prior to making an informed decision.
Highlights/ Key Takeaways
- Debt consolidation and credit card refinancing are two popular methods for transferring high-interest debt to a single loan or credit card.
- While credit card refinancing is a type of debt consolidation, debt consolidation is a much broader concept, relating to all types of debt like medical bills, car loans, store credit cards, and more.
- The goal of credit card refinancing is to get a more favorable interest rate. The goal of general debt consolidation is to combine multiple types of debt into one to simplify the repayment process.
- Depending on your financial situation, either debt consolidation or credit card refinancing may be the best option for you, - make sure to do your research!
Credit Card Refinancing vs Debt Consolidation: Similarities and Differences
While the terms “debt consolidation” and “credit card refinancing” are often used interchangeably, they are not exactly the same. Let us take a closer look at the similarities and differences between the two.
How Are Credit Card Refinancing and Debt Consolidation Similar?
Both debt consolidation and credit card refinancing involve transferring all your debt to a new loan or credit card with the goal of combining multiple debt payments into a single one. In fact, credit card refinancing is a specific type of debt consolidation, concerned with consolidating credit card debt.
What’s the Difference Between Credit Card Refinancing and Debt Consolidation?
A few key differences between debt consolidation and credit card refinancing are as follows:
- Credit card refinancing deals with credit card debt. Debt consolidation can involve credit card debt, store credit card debt, personal loans, car loans, medical bills, and more.
- Credit card refinancing can involve refinancing just one credit card to get better terms. Debt consolidation always involves several debts.
- Credit card refinancing is usually done with the goal of reducing the total interest charges. Debt consolidation is done with the purpose of simplifying the process of paying off debt. This means that the debt consolidation loan may have the same interest rate as the old debt.
Comparing Credit Card Refinancing vs Debt Consolidation
| Category | Credit Card Refinancing | Debt Consolidation |
| Definition | Financial strategy to find better rates and terms for existing credit card debt. | Financial strategy to combine several loans or debts into a single loan. |
| Benefits | Reduces the interest rate, makes it easier to track payments, helps you get out of debt faster, minimally affects the credit score | Can help you achieve financial freedom, makes it easier to track payments, may reduce total interest expense |
| Drawbacks | Requires a good credit score, new credit card limit may not be enough, may have additional fees | Comes with origination fees, negatively affects the credit score, often requires collateral, has a relatively complex qualification process |
| Who It’s Best for | Those looking to reduce interest expenses on credit card debt. Those, whose credit score has improved sufficiently to help them qualify for a lower rate. | Those struggling to juggle multiple loan payments and/or credit card debts. Those looking for a way to become debt-free. |
| How to Do It | Negotiate your credit card terms with your current credit company or apply for a brand-new credit card with the same or different lender. | Find and compare multiple debt consolidation loans before submitting your application. You can also work with a debt consolidation company or a credit counselor to enter a dedicated debt consolidation program. |
What Is Credit Card Refinancing?
Credit card refinancing is a type of debt consolidation, which involves finding better rates and terms for your credit card debt. One common method of credit card refinancing is a balance transfer: the process of moving the existing credit balance to a new card with better rates and terms.
If you have been making your payments on time and have improved your credit score since originally applying for your credit card, you may even be able to negotiate better terms by simply talking to your current credit card company. If the lender refuses to lower the interest rate on your existing credit card, you can still try to apply for a new card with the same lender.
Pros and Cons of Credit Card Refinancing
Credit card refinancing is an excellent way to reduce your regular interest payments and help you pay off your credit card debt faster. Negotiating lower interest rates is easy and minimally affects your credit score.
However, qualifying for a lower interest rate requires the applicant to have a good credit history. In addition, depending on how much credit card debt you already have, your new credit card limit may not be sufficient to transfer all of your existing credit card balances.
QUOTE
“Credit card refinancing is a type of debt consolidation, which involves finding better rates and terms for your credit card debt.”
What Is Debt Consolidation?
Debt consolidation is a debt management strategy, which involves combining several loans or debts into a single loan.
To consolidate your debt, you would start by taking out a personal debt consolidation loan. You would then use the loan proceeds to cover credit card debt or pay off any other type of debt you may have - whether it be personal loans, medical bills, a car loan, store credit cards, or more. As a result, you will end up with a single loan to stay on top of, ideally with more favorable terms than the original loans.
Just like with any other type of debt relief, you must carefully consider the pros and cons of debt consolidation before applying for a loan.
Pros and Cons of Debt Consolidation
If you aren’t sure how to tackle the numerous loans and credit card balances that accumulated over the years, debt consolidation can serve as the first step toward your debt-free life. By consolidating all of your debt payments into an easy fixed monthly payment, you will be able to stay on track with your payments, minimizing late fees and other charges.
Keep in mind that even though debt consolidation loans for bad credit are available, most debt or credit card consolidation loans have a relatively complex qualification process, may require collateral, and come with origination fees.
QUOTE
“Debt consolidation is a debt relief method, which involves combining several loans or debts into a single loan”
Credit Card Refinancing vs Debt Consolidation: Which Is Right for Me?
Whether credit card refinancing or debt consolidation is right for your financial situation will depend on a few factors:
If your debt burden is relatively small, but you aren’t satisfied with the high interest rates associated with your credit cards, you may try your luck qualifying for a new card with more attractive terms.
On the other hand, if you carry multiple types of debt from different lenders and find it difficult to track and manage the payments, learning how debt consolidation works may be the best option for you. Keep in mind that debt consolidation is not always associated with reducing the overall interest rate, - instead, it focuses on combining all debt into a convenient fixed payment that is easier to manage on a monthly basis.
Final Word
Both credit card refinancing and debt consolidation are viable options for those looking to reduce their overall debt burden. If your main concern is high interest expenses associated with your credit card use, credit card refinancing might be the best option for you. However, if you are looking to simplify the repayment of multiple loans and start your journey to financial freedom, you may want to consider joining a debt consolidation program or applying for a personal debt consolidation loan on your own.
