It’s a story that seemingly never ends. You get out of college, have some car trouble, and find yourself in credit card debt—in many cases—for the first time ever. It can happen very fast. But hopefully, you were able to pay off your credit card debt in just a few months and move on.
In a perfect world, no one would ever have to go into unmanageable credit card debt. But we know this isn’t the reality. There are many reasons people may end up in debt, such as medical bills, unplanned emergencies, or a job layoff. Others may never have learned that it is best to pay a credit card off, in full, each month rather than carry high balances.
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 or credit card consolidation. Essentially, both methods involve paying back your debt with another loan or credit card, ideally at a lower interest rate. Still, the two methods are not the same and both options require careful consideration.
Below, we’ll answer the questions, “What is credit card refinancing?” and “What is credit card consolidation?” Also, we will cover some differences between debt consolidation and credit card refinancing and discuss the pros and cons of each debt payback method, so you’ll have more information that could help you make an informed decision.
What is Credit Card Refinancing?
Credit card refinancing is the process of moving your credit card balance(s) from one card or lender to another.
One such way to do this is by using a balance transfer credit card. A borrower can essentially pay off their credit card(s) with a brand-new balance transfer card that comes with a low- or non-existent interest rate.
With a 0% interest rate, this hypothetical borrower would pay nothing in interest throughout the promotional period and therefore have a better chance at making a dent in their credit card balance. For example, say a borrower has $10,000 in credit card debt on a credit card that charges 20% interest.
By switching to a 0% interest card, and making payments on time, they could save around $2,000 in the first year alone (provided there are no other fees or penalties). If the borrower switched to a card that charged 10% interest in the first year, they could save around $1,000.
Perhaps unsurprisingly, there’s a catch. Low- or no-interest promotional periods don’t last forever, and cards often charge a “balance transfer fee,” which can be 3% to 5% of the total balance.
That means with a 5% balance transfer fee, for example, our hypothetical borrower with $10,000 in credit card debt would pay a balance transfer fee of $500. The borrower would need to weigh the fee against the potential savings.
Refinancing Credit Cards with a Balance Transfer
With credit card refinancing, the borrower is typically transferring one credit card balance to another card, which means that they could potentially continue to charge more money on the new card. That’s because a credit card is “revolving credit,” which means that any time the borrower pays off some of the balance, they are able to re-spend that money up to their credit limit.
A balance transfer (refinancing your credit card debt) can be a great idea to help save on interest and pay off your debt faster. But, where people get into trouble is when they aren’t able to pay off the credit card balance by the time the 0% introductory period ends. And as soon as the 0% interest period ends, the interest rate will go back up. The average credit card interest rate as of this writing is hovering around 17% .
If you can commit to paying off your total balance by the time the introductory period ends, a balance transfer may be a good idea for you. This is because you won’t be accruing additional interest if your balance is $0 by the time the interest rate increases.
What is Credit Card or Debt Consolidation?
Credit card consolidation refers to the process of “paying off” credit card(s) with a lower-interest loan—like a personal loan. Sometimes, people use “consolidation” to describe paying off multiple credit card balances with another credit card, but for the purpose of exploring the two different options, we’ll consider it consolidation with a personal loan.
Generally, a personal loan is a loan paid out in a lump sum with a fixed rate and term. For example, you might have a $10,000 loan with a term of five years at an 8% interest rate that will not change during the duration of the loan.
With a credit card consolidation loan or personal loan, the borrower typically receives the payment in one lump sum. A personal loan is also known as an “installment loan,” because they are paid back, in equal monthly installments, over a set period of time.
Personal loans are generally unsecured, which means that they are not backed by collateral. Loans that are not backed by collateral tend to have higher interest rates than collateralized loans, but don’t put a borrower’s assets at direct risk of bank seizure like a collateralized loan would.
Still, a personal loan may have a lower interest rate than credit cards—credit cards are notorious for having the highest rates of all .
Although the landscape is changing, personal loans can be difficult to qualify for. Some lenders will still charge origination fees, but not all of them. Origination fees typically run from 1% to 8% , depending on your credit score. An applicant’s credit score and other financial data points will also determine the interest rate that the lender offers on a personal loan.
But, there are lenders that don’t charge any fees for personal loans. For example, SoFi doesn’t charge origination, prepayment, or late fees on personal loans.
The Pros and Cons of Credit Card Refinancing with a Balance-Transfer Card
Now that we’ve discussed the differences between debt consolidation and credit card refinancing, let’s explore some of the pros and cons of each option.
Credit Card Refinancing Pros
The primary benefit of using a balance transfer card is the chance to pay off your credit card debt while paying little-to-no interest in the first 12 or 18 months—or whatever the promotional term might be.
For those who have a somewhat small credit card balance—say, what could reasonably be paid off within a year—this could be an effective strategy.
Credit Card Refinancing Cons
Credit card companies often charge a balance transfer fee, which has to be disclosed, but is not always advertised. For some borrowers, the interest rate savings might not be worth the transfer fee. This is especially true if the borrower doesn’t have concrete plans to pay off their debt within the introductory period.
Which brings up another important consideration: Credit card refinancing does not put any structure into place for the borrower to follow in order to fully pay off the credit card debt. A borrower could just as easily continue making only the minimum payments and even add to the balance of the debt.
If a borrower fails to pay off the credit card within the introductory low-interest period, the interest rate could skyrocket—sometimes to insanely high-interest rates (think: 25%).
Also, a credit card’s rate is variable. Not only could the interest rate jump up after the introductory period, it has the potential to change even more thereafter. Credit cards calculate their rates according to market rates.
The Pros and Cons of Consolidating Credit Card Debt with a Personal Loan
Using a personal loan vs a balance transfer card involves consolidating your debt and paying off your debt in fixed installments. So, borrowers make equal payments towards the debt at a fixed rate for a fixed time until it is completely eliminated. And borrowers can’t add to their personal loan debt the way they could potentially add to their revolving credit card debt.
Some online lenders and FinTech companies, like SoFi, are shaking up traditional lending by offering straightforward personal loans that have no hidden fees.
A SoFi personal loan is not only free from origination fees, but has no prepayment penalty. A prepayment penalty could potentially inhibit the borrower from paying their loan down faster, by charging a fee to pay off the loan before the term ends or make extra payments.
In the event that a borrower loses their job, a borrower may qualify for SoFi’s Unemployment Protection Program, wherein loans may be eligible for a temporary forbearance. During forbearance, no payments are due (although interest still accrues), allowing the borrower to get back on track before payments resume.
With most personal loans, the borrower is able to opt for a fixed interest rate. While a variable rate is usually initially offered at a lower rate of interest, it could go up as market rates rise, whereas a fixed rate ensures payments won’t typically change over time—provided the borrower always pay on time, of course.
The terms of a personal loan will almost always be based on the borrower’s credit history and their holistic financial picture, which means that not every borrower will qualify, or qualify for a rate that’s better than the interest rate they’re currently paying on their credit card(s).
Although borrowers can get a quote to be sure, this option might be best for those that have a solid financial history.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the
FTC’s website on credit.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.