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    Debt Consolidation vs. Credit Card Refinancing: Which is Best for You?

    With the cost of living on the rise, it’s an increasingly common situation for adults to accrue some kind of credit card debt – and fast. In a perfect world, people would be able to pay off their outstanding credit in a good time and move on, but it doesn’t always work like that.

    There are several reasons why people end up in debt in 2020. It could be unforeseen medical bills or unemployment. However you’ve ended up in credit card debt, the last thing you want is to feel the burden of the debt every month.

    The worst possible scenario is that you are stuck with a large balance on a high-interest credit card. Thus, making it almost impossible to ever make inroads into your debt.

    That’s where the benefits of debt consolidation and credit card refinancing come into play. In essence, both methods of resolving outstanding debt require you to repay it using another loan or credit card, usually at a much lower interest rate than your existing high-interest card.

    However, there are subtle differences between debt consolidation and credit card refinancing, so we’ve put together this guide to equip you with the pros and cons of each repayment method:

    What is Debt Consolidation?

    Consolidating your debt is a way of paying off existing credit card(s) using a personal loan at a much lower interest rate. You may have incurred credit card debt on multiple cards without realizing it. Debt consolidation loans enable you to combine all of your outstanding debt into one personal loan, repaying it in full over a fixed term and interest rate.

    Typically, a debt consolidation loan will pay off your outstanding credit in one lump sum, requiring you to repay that lump sum in equal monthly instalments.

    Debt consolidation personal loans are often unsecured. An unsecured loan is not backed by collateral and do not put your other financial assets at risk of seizure from the lender.

    What are the Pros and Cons of Debt Consolidation?


    • Extend your repayment period
      If you are concerned that your outstanding credit card balance is spiralling out of control, by consolidating your debt into a fixed-term personal loan, you can extend your repayment period and give yourself more time to repay the debt.
    • Fixed monthly instalments are great for financial planning
      The chance to consolidate outstanding debts into a single, manageable monthly repayment is highly appealing. It makes your debt much easier to budget for until the personal loan has been paid off in full. You may even get to a point when the loan has been repaid that the funds you’ve been setting aside monthly can be put into a separate savings account as you’ve learnt to live without that sum month-to-month.
    • Some loans do not include prepayment penalties
      You may also be fortunate to find a fixed-term personal loan that does not include prepayment penalties. Thus, giving you the chance to overpay each month if you have additional funds available to repay. If you eventually repay your loan faster than the fixed term, you won’t incur a fee.


    • Origination fees can be expensive
      Unlike credit card refinancing which incurs balance transfer fees, debt consolidation loans incur origination fees that function in much the same manner. Depending on the size of your personal loan, the origination fee can range from 1%-8%.
    • Lenders’ strict qualifying criteria can make it hard to secure a loan
      Some personal loan lenders have very stringent criteria for applicants that can make the application process arduous and sometimes fruitless. The application for a debt consolidation loan will require more than just a credit check; you’ll usually need to verify your personal income and assets to satisfy the lender first.

    What is Credit Card Refinancing?

    It’s also possible to move your existing credit card balance from one credit card or lender to another. This is what is known as credit card refinancing. The most common way of transferring or refinancing your credit onto another card is by using a balance transfer credit card.

    It’s possible to apply for credit cards that offer low-interest or even 0% interest on balance transfers for a predetermined period, allowing you to repay your outstanding debt without accruing additional interest for a set timeframe.

    The amount of money that can be saved in interest through credit card refinancing is by no means insignificant.

    Let’s say for example that you had debt on a credit card with a 10% interest rate and you managed to move your balance to a credit card with 0% interest, you could save $1,000 in repayments during a single year, based on a $10,000 outstanding balance.

    What are the Pros and Cons of Credit Card Refinancing?


    • Chance to pay off your credit debt during interest-free promotional period
      Undoubtedly the biggest benefit to credit card refinancing is the chance to pay off your outstanding debt via a balance transfer card that incurs little to no interest during the predefined promotional period – often 12 to 18 months.
    • Speedy application process
      Unlike applications for debt consolidation personal loans, applications for balance transfer credit cards are much quicker. They can typically give you a “yes” or a “no” within a matter of minutes, based largely on your credit score.
    • Balance adds to your available credit line once paid off
      As credit cards are revolving finance arrangements, once you have paid off the outstanding balance from your credit card refinance, the balance will be accessible as a new source of credit, should you need it in future.


    • Interest-free period will always come to an end
      Although a 0% interest rate will be hugely beneficial when it comes to credit card refinancing, always be mindful that this is an introductory rate and not a fixed rate. When the interest-free period comes to an end on a balance transfer credit card, it will usually rise to a double-digit interest rate, which could be greater than the interest paid on your existing credit card(s).
    • Interest rates can be more variable
      Not only will the interest rates change at the end of the introductory period, a balance transfer credit card may also have variable interest rates, which can be problematic for those used to repay a set amount of interest each month.
    • Balance transfer fees incurred
      Although balance transfer credit cards don’t incur origination fees, they do often charge for the transfer of your balance from the existing card to your new one. This fee is typically 3%-5% of the total balance transferred.

    The Bottom Line

    When it comes to making a decision about which option is best for you, it’s best to consider your own specific requirements. If you are mainly looking to lower the interest rate you’re paying on your current credit cards, then credit card refinancing is likely to be the better choice. 

    However, if you are trying to eliminate your debt entirely then a debt consolidation loan will make more sense. This is chiefly due to the fact that personal loans of this type can be split over larger fixed terms which means the overall payments you’ll need to make won’t be too insurmountable.