If you are the kind with a severe credit card debt and a high-interest credit card, you should know that you’re already living in an almost never-ending cycle of minimum payments and more debt. There are a few ways to Pay Off Your Credit Card Debt; credit card refinancing or debt consolidation.
How to Pay Off Your Credit Card Debt
Credit card refinancing and debt consolidation are two big terms with similar meanings. The only thing that makes a difference which one you choose. One of the two will get you a lower interest rate and the other on the other hand, will give you a time limit to pay off your credit cards.
On a norm, it appears that they both accomplish the same goal and to some degree, that may of course, be true. But how they do their work can be very different. For this sole reason, if you’re planning on choosing either, you should first decide which is most important; getting a lower interest rate or paying off your credit cards.
What is credit card refinancing?
Credit card refinancing is also known as a balance transfer. It is simply a process of moving a credit card balance from one card to another that has a more favorable pricing structure.
This literarily may be in the form of moving a $10,000 balance on a credit card that charges 19.9 percent interest, over to one that charges 11.9 percent as an example. Many credit card companies also offer cards with a 0 percent introductory rate as an incentive for you to move a balance to their card.
With that, you can save eight percent per year, or $800, by moving a $10,000 balance—just based on the regular interest rate. However, if the same credit card has a 0 percent introductory rate for 12 months, you’ll save nearly $2,000 in interest just in the first year.
Credit card refinancing is more about lowering your interest rate and appears to be less effective than debt consolidation at getting out of debt, since it is purposely to move a loan balance from one credit card to another.
What is debt consolidation?
Debt consolidation is about moving several credit card balances over to a single loan, with one monthly payment. Most times, it can be accomplished by moving several small credit card balances over to one credit card with a very high credit limit and commonly done through the use of a personal loan.
Personal loans are unsecured, but on the other end, offers a fixed interest rate, fixed monthly payments, and a very specific loan term which means that you’ll have the same monthly payment at the same interest rate each month, until you have the loan repaid in full.
If you’re looking to eliminate credit card debt, debt consolidation is usually a more effective strategy than credit card refinancing. This is because, a debt consolidation loan is paid off at the end of the term, while credit card refinancing keeps you in a revolving payment arrangement which means there is potentially no end.
Advantages of credit card refinancing
0 percent interest rate on balance transfers
Credit card lenders frequently make offers in which they will provide an interest-free credit line for a specific amount of time, usually six months to 18 months after a balance is transferred. As described above, this can result in a substantial temporary savings in interest expense.
Quick application process
Whereas personal loan applications may take a few days to process and require paperwork to verify your income, a credit card application is typically a single online form and, in most cases, you’ll get an decision within a minute or two.
You’re replacing one credit card debt with another at a better interest rate
The most tangible benefit of a credit card refinance is getting a lower interest rate. This can take place either in the form of the temporary 0 percent introductory rate offer, or through a lower permanent rate.
Your credit line can be re-accessed as it’s paid down
Since credit cards are revolving arrangements, any balance that you pay off can be accessed later as a new source of credit. Once the line has been paid off completely, you will have access to the entire balance once again.
Disadvantages of credit card refinancing
0 percent interest rate will come to an end
As attractive as a 0 percent introductory rate is, they always come to an end. When they do, the permanent rate is usually something in double digits. It’s even possible that the permanent rate will be higher than what you’re currently paying on your credit cards.
Variable interest rates
Unlike debt consolidation loans that have fixed rates, credit card refinances are still credit cards, and therefore carry variable rates. The 11.9 percent rate that you start out with could go to 19.9 percent at some time in the future.
Balance transfer fees
This is a little known fee that’s charged on nearly every credit card that offers a balance transfer, particularly with a 0 percent introductory rate. The transfer fee is generally three to five percent of the amount of the balance transferred. That could add as much as $500 to the cost of a $10,000 balance transfer.
You may never pay off the balance
Since credit cards are revolving arrangements, there’s an excellent chance you’ll never pay off the balance. That’s because, at a minimum, your monthly payment drops as your outstanding loan balance falls. This is why credit card refinancing is usually not the best way to eliminate credit card debt.
Advantages of debt consolidation
Fixed interest rate
Though it’s possible for personal loans to have variable interest rates, most have fixed rates. This means that your rate will never go up.
Rate may be lower than what you’re paying on your credit card
In many cases, particularly if you have strong credit, you will pay a lower interest rate on a personal loan than you will on your current credit cards. It’s possible to get personal loan rates in single digits.
Fixed monthly payment
This means that your payment will remain constant until the loan is fully paid.
Definite payoff term
Personal loans carry a fixed term, and at the end of that term, your debt will be fully paid. This is why debt consolidation using personal loans tends to be a more effective way to pay off revolving debt than a credit card refinance.
Disadvantages of debt consolidation
Payment never drop
For example, if you’re paying $400 a month on a $10,000 loan, the payment will still be $400 when the balance has been paid down the $5,000.
Personal loans typically don’t have balance transfer fees, but they do have origination fees that function in much the same way. Depending on your credit, they can range between one and six percent of the new loan amount.
More involved application process
personal loans usually require a formal application process. That will include not just a credit check, but also that you supply documentation verifying your income and even certain financial assets.
Might set you up to run up your credit cards again—one of the hidden dangers in any debt consolidation arrangement is the possibility that you may use the consolidation to lower your monthly debt payments, but then run up the credit cards that have been paid off.
Which is right for you?
If you’re mostly looking to lower the interest rate you’re paying on your current credit cards, credit card refinancing may be the better choice. Just be careful not to be too heavily focused on a 0 percent introductory interest rate offer. That only makes sense if the permanent interest rate on the new credit card is also substantially lower than what you’re paying on your current credit cards.
If your primary interest is in paying off your credit card balances completely, then a debt consolidation using a personal loan will be the better choice. The fact that personal loans have fixed terms which are usually three to five years, makes it more for you to completely get out of debt.
Whichever your choice is, carefully evaluate the interest rate and fees on the new loan, and never ever forget to expect the worst scenario!