If you’re one of the 189 million Americans who have a credit card, there’s a strong chance you have at least four credit cards. You’re probably carrying a credit card balance worth about $6,000.
Credit cards are handy financial tools, no doubt. They can get you out of a jam when your account balance is low and reward programs run by various credit card companies can result in real savings.
However, these cards come at a cost. It’s so easy to rack up huge amounts of debt.
If you’re already in this situation, you’re probably looking into credit card refinancing vs debt consolidation as a way to deal with your debt. Which is the better method?
Continue reading for deeper insight.
What Is Credit Card Refinancing?
In general, refinancing means replacing an existing loan with a new one, usually with better terms, such as a lower interest rate or increased loan term.
When you have credit card debt, it’s possible to refinance it.
For instance, if you have one credit card with a $5,000 balance, you’ll start paying interest on this balance if you let it roll over to the next month or billing cycle. If it’s charging 12% APR, you’ll pay a 1 percent monthly interest ($50) for every month the balance remains uncleared.
$50 a month might seem negligible, but if you go a year without settling the balance, the interest will add up to more than $600. Quite a tidy sum now, right?
Credit card refinancing helps you get better terms on your existing balance. For instance, you could refinance the credit card and get a 9% APR. As a result, your monthly interest will drop to about $37.
However, there are requirements you’ll need to meet before your credit card refinancing applications can be approved.
What Is Debt Consolidation?
Debt consolidation is the process of converting multiple loans into one. The consolidated loan will typically have a lower interest rate than the average interest charged on the consolidated loans.
For example, let’s say you have 3 credit cards, each with a $1,000 balance in default. So, in total, you owe at least $3,000.
Card 1 charges 10% APR, card 2 12% APR, and card 3 8% APR. The weighted APR is 33%.
This means for every month the balances remain unsettled; you’ll pay about $80 in interest.
When you consolidate the credit cards, you’ll get the money to pay off the outstanding balances. You’ll now focus on repaying the consolidation loan. If it’s charging 20% APR, for instance, you can see how you’ll save a decent amount of money.
If you’re interested in this option, you can find a debt consolidation company that can help. Just be sure to choose a BBB-accredited firm. Read more here on why BBB accreditation matters.
Credit Card Refinancing vs Debt Consolidation: Which Is Better?
In the credit card refinancing vs debt consolidation battle, it’s not easy to pick a clear winner. Both will result in savings, as long as you’re getting better terms. Ultimately, it could come down to the option that is easier to qualify for.
Keep reading our blog for more financial tips and advice.