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Credit Card Refinancing vs Debt Consolidation, Which Option is Preferable?

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Paying off debt is an essential goal to a healthy financial life. When looking to pay down debt, there are two popular options: credit card refinancing vs. debt consolidation. Which is the best option? There are benefits and downfalls to both, depending on your current interest rates, credit score and more. Let’s examine each option.

Credit Card Refinancing
You're not alone if you feel like your credit card balance is increasing. Credit card debt in the U.S. reached $930.6 billion at the end of 2022, with the average American carrying a balance of $5,805.
One method of paying off that debt is credit card refinancing, where you transfer the balance of one or more credit card(s) to another with a lower interest rate. This new card will have a low or 0% interest rate for a promotional period of approximately 12-18 months and sometimes up to 21 months.
Let's say you're carrying a balance of $10,000 on a card with 20% interest. By refinancing your credit card and switching to one with 0% interest, you can save around $2,000 in the first year if there are no additional fees and by making payments on time.
Pros — As we've seen, one of the biggest positives of credit card refinancing is lower interest rates. In the example above, even a 10% interest rate would save around $1,000, provided you pay on time each month.

Paying off your debt within the promotional period is a great way to save money and improve your credit score in the long run. It's also easy to apply for, and you'll receive an answer quickly. If you can find a card with a high enough limit, you can move all your debt onto one card.
  • Save money on interest
  • One simple payment
  • Get out of debt faster
Cons You will sometimes encounter fees of around 3-5% of the balance transferred, which lenders add to the amount owed. Also, not everyone will qualify for a balance transfer card.
To get the 0% interest rate, you will usually need to have a credit score above 670. An even better one will grant you a longer promotional period with little to no interest. Plus, opening a credit card harms your credit score in the short term.
  • Added fees
  • Limited options
  • Credit score impact
Bottom Line — Credit card refinancing is an excellent way to save money on interest if you can find a card with 0% interest and few, if any, fees. Then, pay off your balance within the promotional period, and your debt is gone.
However, if you can't pay it off during that 0% period, the balance transfer card's rate will increase to 16-25% depending on the card, negating the purpose of the transfer. In that case, you're likely not saving money and may want to consider debt consolidation as an alternative option.

Debt Consolidation
Like credit card refinancing, debt consolidation is another method to help reduce the amount of money owed. However, it works slightly differently and might be better than credit card refinancing for some.
Debt consolidation takes multiple debts with higher interest rates and rolls them into a single payment utilizing a debt consolidation loan. This loan could have a lower interest rate based on your credit score and a more extended repayment period. 
Let's say you have two credit cards with a total balance of $35,000 and a combined interest rate of 21.99%. At this rate, it will take 3.5 years to pay off and cost $15,400 in interest. However, if you consolidate that debt into a five-year loan with 13% interest, your monthly payment will drop slightly, and you'll save $2,618 in interest.
Pros — An extended repayment period and lower monthly payments are a big positive of debt consolidation. This saves you money in interest and frees up your monthly budget. If you qualify, you might also see a lower interest rate.
Debt consolidation is also simple and convenient, considering you make one monthly payment instead of two or more. Ultimately, your credit score will also improve as you eliminate debts.
  • Reduced monthly payments
  • One simple payment
  • Improved credit score
Cons — Your interest rate will depend on your credit score. You likely won't receive the best rates if it's not good. This means your options for a good loan are limited, meaning you might not save money.
Your credit score will also take a minor hit when you open the loan. Debt consolidation only works if you adjust your spending habits and commit to getting out of debt.
  • Potentially higher interest rates
  • Limited options
  • Credit score impact
Bottom Line — There are several critical things to consider when considering credit card refinancing vs. debt consolidation. Credit card refinancing can result in lower interest rates but can also come with fees. Debt consolidation can result in lower monthly payments.
However, it often comes with potentially higher interest rates and limited options. Ultimately, the best choice for you will depend on your circumstances.
You're not alone in your journey to eliminate debt. Power Financial Credit Union experts understand that debt solutions aren't universal, and we're ready to make a tailor-made plan for you. So explore your options and see what's right for you. Contact us today to learn how we can support your financial goals.