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Credit cards are handy, but mismanagement of finances can lead them to end as a liability. If you are dealing with financially challenging times and can’t gather enough funds for paying off your credit cards, then you need to find a way to whittle down your debt in a short period. Mustang Advisors is one of our favorites. Credit card refinancing and debt consolidation is among the most popular options to ease your debt burden.
If you have the ability to set aside a certain amount of income every month, Mustang Advisors recommends that you try the debt avalanche method before considering credit card refinancing or debt consolidation.
Credit Card Refinancing vs. Debt Consolidation – What to Choose?
Credit card refinancing and debt consolidation seems to work similarly on the surface, but choosing one of them makes a significant difference. One gives you a set time to pay off debt while the other gets you a lower interest and an extended period to reduce your debt.
Credit card refinancing is ideal for those debtors who have a good credit score. It usually involves getting a credit card that offers a balance transfer option with zero interest and with a large credit limit. You can use this card to move your debt from high-interest credit cards to a new card. Usually, the 0% interest is allowed for an introductory period ranging between 12 to 18 months. Once this grace period ends, the card begins to charge a high interest rate. This is why credit card refinancing can only work if you need a way to get out of debt without paying exorbitant interest and fees.
A personal loan for debt consolidation involves taking a new loan with the sole purpose of paying off a high-interest credit card debt. It can be a secured loan like a home equity loan or an unsecured one, such as a personal loan with average credit.
Let’s dig deeper into credit card refinancing vs. debt consolidation.
Credit Card Refinancing
Credit card refinancing is a temporary fix to lower your monthly payments. It involves transferring balances from multiple credit cards to a single card. This card is unique because it offers an interest-free grace period extending from 12 to 18 months.
When to Go For Credit Card Refinancing?
Credit card refinancing is hugely beneficial for saving money, provided you receive enough credit limit to combine all your credit card debts and pay them off within the zero-interest period.
Imagine a scenario where you have to pay a 25% annual interest on a $2,000 balance. Each year you pay $500 in interest alone. Four $2,000 balances amount to $2,000 in interest charges. If the rate of compounding interest is unmanageable, you will find it difficult to make timely payments.
On the contrary, if you don’t have to pay interest, it ensures that your monthly payments can quickly pay off the principal amount. In the event where you are unable to secure 0% interest, try to move your balances to the card with the lowest interest.
When Not to Go For Credit Card Refinancing?
Usually, you are required to have a credit score of 680 or more for getting a credit card refinancing offer. You are bound to face higher interest if you can’t erase your debt before the end of the specified grace period.
Debt consolidation isn’t everyone’s cup of tea. A home equity loan is a simple and effective method to borrow money and reduce your credit card debt if you have decent equity in a home, a steady income, and a good credit rating.
You can go for a personal loan if home equity doesn’t sound feasible. But a personal loan is more difficult to obtain because it is an unsecured loan. It also comes with a higher interest rate.
When to Go For Debt Consolidation?
Debt consolidation allows you to benefit from lower interest rates and an extended repayment period.
Credit card interest is applied to the current unpaid credit card debt balance on a monthly basis. With an interest rate that can go as high as 25%, you could be trapped in a vicious cycle.
Conversely, home equity loans charge lower interest—around 5% to 8% at max. You repay both the interest and principal every month until the loan is repaid. You can also pay off your debt earlier if you have acquired another revenue stream.
With personal loans, you might have to pay origination fees as high as 8% of the amount borrowed. The interest rate varies based on your financial history and credit score. You are likely to face a higher interest rate if you have maintained a poor credit score.
When Not to Go For Debt Consolidation?
HELOC or home equity line of credit poses a major risk. You are putting up your home as collateral. You can lose your home due to foreclosure if you reach a point when you cannot afford monthly payments.
If you switch to a personal loan, you need to pay upfront charges in the form of origination fees.
Credit Card Refinancing vs. Debt Consolidation
Contemplating credit card refinancing vs. debt consolidation often boils down to timing.
Choose credit refinancing when:
- You have sufficient income.
- You are disciplined enough to cut down your spending for the specified grace period so your debts can be paid off with the help of a 0% interest.
Generally, the upfront cost is low in credit card refinancing. Coupled with an adequate promotion offer, it can eliminate your credit card balances in no time. Another reason to opt for refinancing is its suitability for those who are only looking to bring down their monthly payments. You save money when you move from a credit card with 21% APR to a card with 15% APR. However, do evaluate the charges you need to pay for balance transfer fees.
Debt consolidation is a better option if you can’t pay off your balances within the grace period. It is convenient because you have to make a single monthly payment for an extended period. Usually, it can require you to pay off your complete debt within three to five years.
Eva Berns is versatile and a gifted writer. She joined XtraPoint Football a few months ago and has helped our readership grow a lot. She always connects with the readers and produces noteworthy news pieces. She is also working on her first novel, which she plans to publish by the end of this year.