Credit cards have largely become a fact of life. With over 80% of American adults owning one, and the average American owning more than three of them, these little plastic cards are the prime way we purchase goods and pay bills in the USA.
Credit card companies have offered customers countless incentives to continue using these cards, like cash-back bonuses, but they may not provide an incentive to pay off the balance. Using credit cards instead of cash or debit cards can help you afford items in the short term, but they come with an added responsibility of regularly paying them off, usually with fixed interest rates. But what happens when you can’t afford to pay the balance?
| Category | Credit Card Refinancing | Debt Consolidation |
|---|---|---|
| Definition | The process of transferring credit card debt to a new credit card with better terms, such as lower interest rates or promotional offers. | Combining multiple debts into a single loan or repayment plan to simplify payments and potentially secure better terms. |
| Types of Debt | Primarily focuses on credit card debt. | Can include various types of debt, such as credit card debt, personal loans, medical bills, or student loans. |
| Method of Repayment | Requires opening a new credit card account and transferring existing balances to the new card. | Involves obtaining a new loan or using a debt management program to consolidate and repay debts. |
| Interest Rates | Aims to secure lower interest rates or promotional offers on the new credit card. | Seeks to obtain a lower interest rate on the consolidated loan or program. |
| Repayment Terms | Relies on the terms and conditions of the new credit card, which may include introductory periods or fixed repayment schedules. | Offers various repayment options, such as fixed monthly payments or extended repayment periods. |
| Monthly Payments | Requires making monthly payments to the new credit card issuer. | Involves making regular payments to the loan provider or debt management program. |
| Impact on Credit Score | May result in a temporary dip in credit score due to the opening of a new credit account and potential credit inquiries. | Can positively impact credit score by consolidating debts and making consistent payments. |
| Fees and Charges | May involve balance transfer fees or annual fees on the new credit card. | May incur fees such as origination fees, closing costs, or enrollment fees for debt consolidation loans or programs. |
| Suitability | Ideal for individuals with good credit scores and manageable credit card debt seeking better interest rates or promotional offers. | Suitable for individuals with multiple debts, high interest rates, or struggling to manage multiple payments. |
| Flexibility | Offers flexibility to choose the new credit card and potential rewards or benefits associated with it. | Provides flexibility in selecting the loan terms, repayment plans, and consolidation options based on individual needs. |
| Professional Assistance | Can be done independently without professional assistance. | May require the assistance of credit counselors, debt consolidation companies, or loan providers. |
| Risk of Accumulating Debt | Presents a risk of accumulating more debt if responsible spending habits are not maintained. | Carries a risk of accumulating more debt if spending is not controlled after consolidation. |
| Overall Cost and Savings | Potential for savings if lower interest rates or promotional offers are secured. | Possibility of cost savings through lower interest rates or reduced monthly payments. |
What is a Credit Card Balance?
New Credit Card Rules From The Federal Reserve
Before we can explain how to pay a balance, you need to know what it is. When you use credit cards, rather than taking the money you spend directly out of your bank account, it is charged to a card you will pay off later.
Credit card balances pros and cons include the fact that you get this extra time to pay off the card later, but also that you have to pay extra because the credit card companies charge interest. The latter is one of the biggest cons of credit card use, and you must thoroughly understand the fees the card provider will set before jumping in.
When you use credit cards, you build up a balance on the card. Regularly paying off this balance is the key to maintaining a good credit score and being able to save money by not having to pay late fees. There are a few different ways to go about this.
How to Pay Off a Balance
Paying off a credit card balance looks different for everyone, depending on their personal circumstances. Someone in a stable financial situation would simply need to set aside a portion of their monthly earnings and use that money to pay off their credit cards. Most credit card providers require you to pay off the balance every month, and doing so will build up a good credit score and prevent you from paying extra interest and fees.
It is often the case, however, that someone cannot pay off their credit card balance. Perhaps they have spent too much with their credit cards, maybe they lost their job, or those medical bills were so exorbitant that they just don’t have anything left to pay off the cards. In this case, there are two options: credit card refinancing or debt consolidation. Both can result in a paid-off credit card balance. Let’s look at credit card refinancing vs debt consolidation in all their particulars.
What is Credit Card Refinancing?
So, what exactly is credit card refinancing? Simply put, it is an option for paying off your credit card balance by applying for a new credit card. You would do this to buy time to pay later and combine your debt into one card.
When refinancing with a new credit card, you should find a credit card company that offers one with a 0% credit card introductory rate. While this rate is never permanent, it does mean you will have a lower rate that can make using it to pay off other cards worthwhile. It would mean you can save money and pay off the balance sooner because the new card would have a lower interest rate than your previous ones.
There are a few essential factors to consider before applying for a low-interest-rate credit card to pay off other balances, which we will get into later in the article. For now, know that credit card refinancing is one of two options for those who cannot pay off their current balances and that it comes with its own responsibilities.
What is Debt Consolidation?
Other than credit card refinancing, there is the choice of debt consolidation to pay off credit card balances. What does this mean? Well, to consolidate debt means to combine all your debts into one loan. To do this, you would take out a personal loan to pay off your credit card balances. Again, as with refinancing, this would buy you time to pay off your debts and could mean a lower interest rate.
Furthermore, it is possible to combine multiple high-interest debt consolidation loans into one. However, you would only do this if you cannot possibly pay off your other balances. Taking out loans means committing to paying them off by a set date, and it is important to recognize that every loan or credit card has requirements you must abide by.
The Difference Between Refinancing and Consolidation
You are probably asking: what is the difference between these two choices? The answer is simple. Credit card refinancing is when you take out a low-interest-rate credit card to pay off other cards, while debt consolidation is when you take out a personal loan to pay off those balances.
Some other differences between these two include the rules surrounding refinancing and debt consolidation transfer fees. It is usually the case that refinancing requires you to pay balance transfer fees of between 3% and 5%, while debt consolidation will not have these fees. Each choice has its peculiar characteristics, an understanding of which can make it easier for you to decide between the two for your unique circumstances.
We would stress that it is in your best interest to pay off any debts from credit cards or loans by their determined deadlines. It is not recommended that you take out a low-interest card or a personal loan for any reason other than being unable to pay off your current debts by their deadlines. Knowing the pros and cons of these options can help you decide which is the best choice for you.
Pros and Cons of Refinancing
Pros of Credit Card Refinancing:
- This choice gives you a 0% interest rate for the introductory period balance transfer, which will usually last between 12 and 18 months.
- These are easy to apply for, especially if you already have credit cards.
- Assuming your current credit card balances are low enough, you can consolidate all of them into this one low-interest card, which will save you money.
Cons of Credit Card Refinancing:
- This choice usually comes with a 3-5% balance transfer fee.
- For anyone with high amounts of debt that they cannot pay off within those 12-18 months, the interest rate can skyrocket to 16-25%.
- Applying for a 0% introductory rate card requires you to have good to excellent credit.
- If you make a late payment or go above the credit limit, you could lose the 0% rate.
- You may not be able to transfer certain types of debt.
- The balance could end up never being paid off because the credit card provider has no incentive to get you to pay it off, so they lower your monthly payment as your balance falls.
Pros and Cons of Debt Consolidation
Pros of Debt Consolidation:
- You can choose a fixed repayment term, which means the balance will be paid off in its entirety by that date. This is usually between 3 and 5 years.
- The monthly loan payment is also fixed, which keeps you on track to pay off the debt and means you can stick to a set financial plan.
- Personal loans carry low-interest rates, usually fixed, so they won’t change on you down the road.
- You can use this loan to pay off any outstanding balances on credit cards or other debts.
- It gives you more time to pay off debts than credit card refinancing.
- Unsecured personal loans, or those from friends or family, will not require collateral and may have lower interest rates or easy repayment terms.
Cons of Debt Consolidation:
- With this choice, there can be additional fees, such as origination fees of between 1% and 6% of the new loan’s balance.
- When you apply for a personal loan, the lender will look at your credit score and financial history to gauge your creditworthiness. A poor credit score could mean higher interest rates or an inability to qualify for a personal loan.
- Since you are taking more time to pay off your credit cards with a personal loan, if you do not cease using credit cards altogether or decrease credit card spending, you can end up in the same place with unpayable credit card debt.
- Secured personal loans that require collateral, like home equity loans, can mean risking the foreclosure of your home if you can’t pay the monthly payments.
Which is Best for Me?
If you are wondering which of these is best for your circumstances, we recommend considering your financial situation. The first question you should ask yourself is: can I meet the repayment terms of either of these options? Consider the pros and cons we have listed and go from there.
Remember: your financial goal is to pay off your debts regularly and keep a good credit score, so choose the best option to lead you towards that goal.
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