If you have high-interest credit card debt and are ready to put together a plan to pay it back, you might be considering one of two popular methods: credit card refinancing vs. debt consolidation.
Both involve paying off your debt with another credit card or loan, ideally at a lower interest rate. Still, the two methods are not the same, and both options require careful consideration. Below, we’ll discuss the pros and cons of each debt payback method, so you can make an informed decision.
Table of Contents
Key Points
• Credit card refinancing transfers high-interest debt to a lower-interest card, often with a 0% APR promotional period, to save on interest.
• Debt consolidation combines multiple debts into one loan, simplifying payments and potentially reducing interest.
• Refinancing is ideal for smaller debts that can be paid off quickly, while consolidation suits larger debts needing structured payments.
• Consider credit score, debt amount, and your financial situation when choosing between refinancing and consolidation.
• Refinancing may incur fees and affect credit scores, while consolidation offers fixed payments but may not significantly lower interest.
What Is Credit Card Refinancing and How Does it Work?
Credit card refinancing is the process of moving your credit card balance(s) from one card or lender to another with a lower interest rate. The main purpose of refinancing is to reduce the amount of interest you’re paying with a lower rate while you pay off the balance.
Common Ways to Refinance Credit Card Debt
A common way to accomplish a credit card refinance is to pay off your existing credit cards with a brand-new balance-transfer credit card. This type of card offers a low or 0% interest rate for a promotional period that may last from a few months to 18 months or more. Can you refinance a credit card that you already have? Perhaps. You can always try to approach your existing credit card issuer and ask for a lower interest rate, possibly by doing a balance transfer to a lower-rate card issued by the same company.
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What are the Benefits of Credit Card Refinancing?
We’ve discussed what is credit card refinancing and its goal: to lower your interest rate. Now let’s explore some of the benefits (and drawbacks) of refinancing.
Pros
• You may qualify for a promotional 0% annual percentage rate (APR) during your card’s introductory period. If you can pay down your debt during this time, you could potentially get out of debt faster.
• Depending on the interest rate you’re offered, you could save money in interest charges.
• Bill paying would be streamlined if you decide to refinance multiple credit cards into one new credit card.
• If monthly payments are reasonable, it may be easier to consistently pay them on time. This can help build your credit score.
Cons
• The introductory 0% interest period is short-term, and after it ends, the interest rate can skyrocket to as high as 25%.
• There may be a balance transfer fee of 3%-5%, which can add to your debt.
• 0% interest balance transfer cards often require a good or excellent credit score to qualify.
• Your credit score may temporarily dip a few points when you apply for a new credit card or loan. That’s because the lender will likely run a hard credit check.
Recommended: What Is the 10% Credit Card Interest Rate Cap Act?
Who Should Consider Credit Card Refinancing?
Credit card refinancing isn’t right for everyone. That said, a balance transfer to a 0% APR card could be a good move if you have a smaller debt to manage or are carrying a balance on more than one credit card. Plus, transferring multiple balances into one card can streamline bills. All of the usual credit card rules apply when you transfer a balance, so you’ll want to make every payment on time with your new card.
Refinancing may make sense if you’re looking for better terms on your credit card debt, qualify for a 0% APR, and can pay off the balance before the promotional period ends.
So, as you’re weighing your options, you’ll want to consider a number of factors, including:
• Your credit score and credit history
• How much debt you have
• Your personal finances and whether or not you can eliminate the debt fairly quickly
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What Is Credit Card Debt Consolidation?
Credit card debt consolidation is an alternative to credit card refinancing. The term “debt consolidation” refers to the process of paying off multiple credit cards or other types of debt (such as medical debt) with a single loan, referred to as a debt consolidation loan. The main purpose of consolidation is to simplify bills by combining multiple payments into one fixed loan payment, while ideally also saving on interest.
Types of Debt Consolidation
There are two primary types of debt consolidation loans: a personal loan and a loan secured by your home equity. The latter could be either a home equity loan or a home equity line of credit (HELOC). Not everyone owns a home or has enough equity to qualify for home equity lending, so let’s focus on what a personal loan is and how you might use it to consolidate debt.
A personal loan (sometimes referred to as a debt consolidation loan) will often have a lower interest rate than most credit cards (with the exception of the 0% APR period on a credit card, of course). However in order to qualify for a lower rate on a personal loan, you’ll need to have a strong credit score, which will largely determine your personal loan interest rate. Depending on your financial profile, you might be able to borrow anywhere from $5,000 to $100,000.
There are pros and cons to paying off multiple credit cards with a single short-term loan. Let’s take a look:
Pros
• Personal loans often have lower interest rates than credit cards and can save you money on monthly payments as well as on interest charges over the life of your debt repayment.
• You can pay off multiple debts with one loan, which can take the hassle out of bill paying.
• The structured nature of a personal loan means you can make equal payments toward the debt at a fixed rate until it is eliminated.
• With most personal loans, you can opt for a fixed interest rate, which ensures payments won’t change over time. (Variable interest rate loans are available, but their lower initial rate can go up as market rates rise.)
Cons
• The terms of a loan will almost always be based on your credit history and holistic financial picture (another reminder to keep an eye on personal finance basics like making timely payments). Not every borrower will qualify for a low interest rate or get approved for a personal loan at all.
• Some lenders may charge fees, including personal loan origination fees.
đź’ˇ Quick Tip: Wherever you stand on the proposed Trump credit card interest cap, one of the best strategies to pay down high-interest credit card debt is to secure a lower interest rate. A SoFi personal loan for credit card debt can provide a cheaper, faster, and predictable way to pay off debt.
Credit Card Refinancing vs. Debt Consolidation
To recap, the difference between debt consolidation and a credit card refinance is first a matter of goals.
With credit card refinancing — as with other forms of debt refinancing — the aim is to save money by lowering your interest rate. Debt consolidation may or may not save you money on interest, but will certainly simplify bills by replacing multiple credit card obligations with a single monthly payment and a structured payback schedule. This structure and simplification can be just what it takes to help some borrowers who are struggling with credit to get their debt paid off.
The other difference is that credit card refinancing typically utilizes a balance transfer credit card that has a 0% or low interest rate for a short time. This limits the amount you can transfer to what you can comfortably pay off in a year or so. Debt consolidation utilizes a personal loan, which allows for higher balances to be paid off over a longer payback period.
Which strategy is right for you? That depends on a number of factors, including the amount of debt you have, your current interest rates, and whether you’re able to stick to a structured repayment schedule. Of course, it’s important to regulate your use of credit cards in either scenario. The last thing you want is to be paying off a personal loan or facing the expiration of a 0% interest rate when you’ve racked up more credit card debt.
The chart below sums up the credit card refinancing vs. debt consolidation story.
Side-by-Side Comparison of Key Features
| Credit Card Refinancing | Debt Consolidation Loan | |
|---|---|---|
| Account Type | New credit card with introductory balance-transfer interest rate offer | Lump-sum personal loan |
| Maximum Amount | Will vary based on lender rules and borrower qualifications | $5,000-$100,000 |
| Upfront Fees | 3%-5% | Some lenders have no fees upfront |
| Interest Rate | Typically has 0% interest for first 12-18 months, followed by market rates, which could be as high as 25% or in some cases more | Fixed interest rate ensures steady payments over the life of the loan |
| Repayment Term | The low interest rate is typically only available for 18 months at most, making this most suited to smaller debts that can be repaid before the interest rate escalates | Up to seven years |
The Takeaway
Credit card refinancing is when a borrower pays off their credit card(s) by moving the balance to another card with a lower interest rate. A popular way to do this is with 0% interest balance transfer credit cards. However, borrowers typically need a high credit score to qualify for the best rates on these cards. Debt consolidation, on the other hand, is when a borrower simplifies multiple debts by paying them off with a personal loan. Personal loans with a fixed low interest rate and a structured payback schedule are a smart option for consolidating debts.
If you have a relatively small balance that can be paid off in a year or so, refinancing with a balance transfer credit card may be right for you. If you have a larger balance or need more time to fully pay it off, personal loans are available.
Credit cards have an average APR of 20%–25%, and your balance can sit for years with almost no principal reduction. Personal loan interest rates average 12%, with a guaranteed payoff date in 2 to 7 years. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. See your rate in minutes.
FAQ
Which is better: credit card refinancing or debt consolidation?
There are advantages and drawbacks to both strategies. Credit card refinancing can help you lower your interest rate, which can save you money. Debt consolidation might save you money on interest, but it will definitely simplify bill paying by replacing multiple cards with one monthly bill.
Is refinancing a credit card worth it?
Refinancing a credit card may be worth the effort because it can lower your interest rate, potentially save you money, and make payments more manageable.
Is refinancing the same as consolidation?
Though refinancing and consolidation can both help you manage your debt, they serve different purposes. Refinancing involves moving credit card debt from one card or lender to another, ideally with a lower interest rate. Paying less in interest while you pay off your debt is the main goal of refinancing. When you consolidate, you settle multiple debts with one loan. Simplifying bills into one fixed loan payment is the main reason to consider this strategy.
How do credit card refinancing and consolidation affect my credit score?
Credit card refinancing and debt consolidation might temporarily reduce your credit score because your lender will likely do a hard credit check to qualify you for the account. But with time and consistent, on-time payments, your credit score should rebound. Consolidating several credit cards into one personal loan might also help improve your credit utilization ratio, which in turn should nudge your score upward. Opening new credit accounts, however, can reduce the overall age of your credit accounts, as can closing old accounts. Both of these can ding your credit score. If you aren’t applying for other forms of financing, such as a mortgage, none of this should be a huge concern so long as you are using the credit card refinance or consolidation to reduce debt and better manage your finances.
What should I consider before refinancing or consolidating?
The most important thing to consider when thinking about credit card refinancing or debt consolidation is whether you will save money when interest and fees are factored in. It’s also important to have a good look at your credit habits. If you think having a new credit card with 0% introductory financing might result in you charging even more and falling more deeply into debt, you might want to consider a personal loan and/or explore credit counseling, in which you will work with a professional to help change unhealthy habits and develop a strategy to reduce debt.
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