Debt Consolidation vs Credit Card Refinancing: What’s the Difference?

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If you’re unsure how to best manage your credit card debt, this guide to debt consolidation vs. credit card refinancing can help. (iStock)

If your credit card balance becomes difficult to manage, paying off those debts with a personal loan may be an option.

Sometimes this is referred to as debt consolidation. Others may call it credit card refinancing. In both cases, this means convert your card balance into a personal loanwhich you will then repay monthly over time.

Here’s what you need to know about debt consolidation versus credit card refinancing. If you’re considering converting your credit card debt into a low-interest personal loan, Credible lets you compare personal loan rates from several lenders.

What is credit card refinancing?

Credit card refinancing involves using another financial product, often a personal loan, to pay off your credit card balance. You then make monthly payments on that loan until it’s paid off in full.

This process can get you a lower interest rate (credit cards have very high rates compared to most personal loans), and it also streamlines repayment, so you only make one payment per month rather than several.

Credit card refinancing is generally best for borrowers who have decent credit and can get personal loans with a lower interest rate than their credit cards.

Where to Get a Credit Card Refinance Loan

Banks, credit unions and online lenders usually offer personal loans that you can use to refinance your credit card debt. This requires a credit check and various forms of financial documentation.

The lender you choose will depend on several factors, including your credit score and how quickly you need the loan. For example, some online lenders can fund a loan as quickly as one business day after loan approval.

It’s a good idea to compare personal loan rates from several lenders before deciding on a credit card refinance loan. Credible is easy for see your prequalified rates in minutes.

Advantages and disadvantages of credit card refinancing

Like any financial product, a debt consolidation loan has advantages and disadvantages to consider.

Benefits of credit card refinancing

  • It consolidates all your debts into one, which simplifies repayment.
  • You may be able to get a lower average interest rate and save money over time.

Disadvantages of credit card refinancing

  • There are often various fees and closing costs that you will need to cover up front.
  • You generally need a good credit score to get a low rate.

Debt Consolidation vs Credit Card Refinancing: Are They Different?

Credit card refinancing and debt consolidation are one and the same thing.

In both scenarios, you use a personal loan or another type of loan product to pay off credit cards and other debts you can have. This essentially replaces your debts with a one-time loan, which you can then repay over time.

Credit Card Refinance vs Balance Transfer Cards

Refinance your credit cards and use a balance transfer card have the same general principle, but the two can have very different results. With a refinance, you end up with one fixed rate payment for the long term. It streamlines the repayment of your many debts and often results in lower interest charges.

With a balance transfer card, you use a new credit card to pay off another card (or more). These cards come with a low introductory rate – often even 0%, which expires after 12-18 months. At this time, the rate increases significantly.

Although balance transfer cards can save you interest if you pay off the balance before the end of your introductory period, if you can’t pay off your new card balance at that time, it could mean much higher long-term interest costs.

How to choose between credit card refinancing and balance transfer cards

The right choice depends on your balance, interest rate, credit score and other factors. Generally speaking, a balance transfer may be a good idea if:

  • You can benefit from a balance transfer card. You generally need good to excellent credit.
  • You can get 0% or a very low launch rate.
  • Balance transfer fees are low.
  • You know you can pay off your balance before the end of the introductory period.

But in other situations, a personal loan makes more sense, especially if:

  • You think it will take you longer to pay off your balances.
  • You need a lower monthly payment.
  • You are not able to qualify for a good balance transfer deal.
  • Adding a personal loan to your credit history could improve your credit mix, an important factor in credit scores.

Here is an example: Let’s say you have $10,000 in credit card debt, and your bank offers you a balance transfer card with 0% interest for 18 months. Under these terms, you’ll need to pay at least $555 per month in order to pay off the balance before your introductory rate expires. If that’s not possible, a personal loan may be a better option, giving you a longer repayment term and lower monthly payments.

Credit card refinancing with a personal loan is generally best when:

  • You have excellent credit and can qualify for a lower rate.
  • You want consistent and reliable payment over the long term.
  • You want to consolidate other debts in addition to your credit cards.

Credit card balance transfers are generally best when:

  • Your balances are low or you know you can pay off the full balance before your original interest rate expires.
  • You can handle an increase in interest rates over the next 12-24 months.
  • You want extra perks for your earning (some balance transfer cards offer travel miles and other perks).

What credit rating do you need to take out a debt consolidation loan?

You don’t need a perfect credit score for a debt consolidation loan, but the higher your score, the more likely you are to qualify for a personal loan in the amount you need and at a great rate. Generally, it takes a score of at least 650 to qualify, and a score of 720 can make it more likely that you qualify for the best APR available.

If you are below these thresholds, you can try a debt consolidation loan for bad credit borrowers or work to improve your score before applying.

When you’re ready to proceed with your loan application or balance transfer credit card, be sure to shop around. Pricing, fees, terms, and eligibility requirements vary by provider. Therefore, comparing at least a few different lenders and credit card companies can ensure you get the best deal.

Credible, it’s easy to view your prequalified personal loan rates in minutes, without affecting your credit.

Nancy I. Romero