If credit card debt, and attendant high interest, is hanging overhead like the Sword of Damocles, it’s probably time to take action. Among possible solutions are credit card refinancing and debt consolidation. Here’s a look at both options.
Credit Card Refinancing
Also called a balance transfer, credit card refinancing means switching a credit card balance from one card to another. It can also mean taking a $10,000 balance on a credit card that comes with 19.9 percent interest and putting it on one that charges 11.9 percent.
In that case, you could save eight percent annually — $800 –by moving a $10,000 balance. But if that card has a 12-month zero percent introductory rate, you’ll save almost $2,000 in interest in the first year alone. Many credit card companies offer such promotions to lure you to move your balance to them.
After all, more than anything else, credit card refinancing is all about securing a lower interest rate.A problem is that low- or no-interest promotional periods eventually expire, and cards frequently charge a balance transfer fee, which could total three percent to five percent of the total balance. So, a borrower with $10,000 in credit card debt who is facing a five percent fee would pay $500 to transfer the balance, which he or she must weight against prospective savings.
When you look at credit card refinancing vs debt consolidation loans, they both have the same machinations, in that they both generally involve “moving” balances. With consolidation, you’re essentially transferring multiple credit card balances to one loan, with one monthly payment.
Consolidation loans, which are personal loans, have fixed interest rates and payments, and exact loan terms. However, because personal loans are usually unsecured – not backed by collateral – they usually have higher interest rates than loans that are attached to collateral. Still, they don’t put your assets at risk, as would a secured loan. And overall, you may get a lower interest rate than what you’re paying now on your credit cards.
It can be difficult to qualify for loan consolidation. Some lenders charge origination fees of between one and eight percent, depending on your credit scoring. That score and factors such as payment history and income will also determine the rate the lender offers on such a loan.
Pros And Cons Of Each
The chief advantage of using a balance transfer card is the opportunity to eliminate your credit card debt while paying little, if any, interest during the card company’s promotional term.
If you have a credit card balance that could be paid within a year, a balance transfer could be a winning strategy. For some borrowers, though, interest rate savings may not sufficiently offset any transfer fee. Plus, credit card refinancing involves a revolving payment situation with potentially no end.
And, if you fail to pay off the card during the introductory period, the interest rate can shoot up and change even more thereafter.
As for a personal loan, which involves consolidating your debt and paying it off monthly, a main advantage is that you can’t add to your potential debt the way you could add to your revolving credit card debt.
Some consolidation loans do come with hidden fees such as prepayment penalties, which could impede you from paying down your loan faster.
In most consolidation cases, though, a fixed interest rate is possible. This means that payment amounts won’t change over time.Not every borrower will qualify for consolidation, however. That means that this option may be best for those with a positive financial picture. Now that you understand credit card refinancing versus debt consolidation, you can make an educated decision regarding your financial situation.
Raj Kumar is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance clap.