Credit card debt is notoriously expensive. Outstanding credit card payments have some of the highest interest rates. One late payment can push you further into debt with its high penalty fees and interest on the outstanding amount. If you can’t pay this off by the next cycle, it’ll get even harder to get off the debt cycle.
Credit card refinancing and credit card consolidation are two popular solutions to managing high-interest credit card debt. They both involve paying off the debt with another credit card or loan, ideally at a lower interest rate. Each of these methods has its own pros and cons. Which is a better option for you depends on your credit score and how much you owe.
Understanding the difference between credit card refinancing vs consolidation and the pros and cons of each can help you make an informed decision.
Credit card refinancing involves moving credit card balances from your current card or lender to a new card or lender. To do this, you need to apply for a credit card that meets two criteria:
Finding a card with 0% interest is key. Many credit card issuers offer new cardholders a zero-percent introductory period. This allows you to transfer debt from your high-interest cards to the new card without paying any interest on the balance.
For credit card refinancing to work, you must pay off the balance during the promotional period, which is typically about 12 to 18 months. Any balance that’s not paid within this introductory period will attract a high-interest rate of anywhere between 16% and 20%.
Credit card consolidation involves taking a personal loan to pay off multiple credit card balances. To consolidate your credit cards, you’ll need to apply for a personal loan. The loan amount will be paid out to you in a lump sum with a fixed interest rate and loan term.
You use the personal loan funds to pay off your high-interest credit card debt. You then pay off the personal loan in monthly payments till it is completely paid off. The biggest advantage of credit card consolidation is that it gives you additional time to pay off your debt at a lower rate of interest.
Personal loans do have high-interest rates because they are generally unsecured or not backed by collateral. Still, the interest rate on a personal loan is still lower than the interest on credit cards.
The right choice for you will depend on your financial situation and the amount of credit card debt you’ve accumulated.
Take time to understand what credit card refinancing vs consolidation involves and the pros and cons of each. This will help you make a decision that’s right for you with regard to eliminating credit card debt.
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