Being savvy with your finances is incredibly important and the best way to do this is to understand what options are available out there for you.
Nobody wants to be in debt, but often it is unavoidable – and for many of us, this is simply a fact of life. When it comes to credit card debt, you may wonder what all the different avenues exist to help you out.
Should you refinance? Should you consolidate your debts? Both of these methods are essentially debt paying off debt.
With all these terms and options, it can be difficult to understand what they all mean and what you should choose. So, we’ve created a helpful guide to inform you of your options and what everything actually means.
So, let’s dive right in.
What Is Credit Card Refinancing?
Credit card refinancing, often known as a balance transfer, is the process whereby a balance of a credit card is transferred to another credit card. Switching your balance to another lender is a good way to try and get a more favorable interest rate and avoid further debt due to high interest rates.
Sometimes you can get lucky and manage to successfully apply for a 0% interest credit card that allows you to transfer your existing balance onto it. Some might have terms that say they’re 0% for a number of months and then an increase in interest for the remaining term of the balance.
This is fantastic as it means you’re only paying towards the balance of the card for a specific time, rather than additional interest charges.
However, the likelihood of being accepted for a 0% credit card will depend on your credit score and personal circumstances. Sometimes, you may only be able to get a card with e.g. a 10% interest rate.
This can sometimes still be helpful depending on your current interest rate on your credit card – as annually you will save a lot of money, especially if you manage to clear the balance before the end of the interest free period.
It’s important to note though that most cards charge a fee for transferring the balance over to them. Often, this is around the 3-5% mark which, depending on your current balance could be in the hundreds or even thousands.
Example: $10,000 balance transferred at 5% = $500 fee. Generally, these fees are added to the balance – sometimes initially, sometimes after 12 months.
It’s crucial to understand though, that by moving a balance to another card – your current card balance is then cleared to $0, which means you can now use it again up to its credit limit.
For many people, this can be too tempting and they end up racking up further debt by maxing out their old card too. It may be wise to either cancel that card or lock it away to prevent you from plunging into more debt.
Pros To Credit Card Refinancing
The biggest pro is the time it offers you. You’re given the breathing space through interest free, or cheaper interest rates, to pay off the balance.
If you’re stuck with a card that has an outrageous interest rate and you’re paying regular rates that aren’t clearing the balance – moving it over to another card is hugely beneficial.
Cons To Credit Card Refinancing
There are a number of cons to credit card refinancing. You could end up in further debt in a variety of ways. First, you could use your old credit card and max it out.
Second, as there is no structure for payments as there are with loans, you could opt to pay the minimum requested payments each month and not come close to clearing the balance – if that’s the case, after the interest free period (if applicable) the rate of interest might go through the roof, meaning you’re in bigger trouble than your old credit card.
It’s also important to know that most credit card interest rates are variable, so at any time – your interest rate could be doubled.
What Is Debt Consolidation?
To put it simply, debt consolidation is where you consolidate your existing debts (put together) and pay them off with one lower interest loan or credit card.
The benefits of this is where you have multiple debts that have high interest rates and pay them all off in full with one loan that you pay off with regular payments, usually taking a few years.
If you take out a personal loan to consolidate your debts, you’ll be offered a sum of money with a specific interest rate over a number of years. For example, you might be offered a $10,000 loan for a term of 5 years with an interest rate of 10%.
These loans are normally unsecured, personal loans which means if you fail to meet the repayments – the creditor will not be able to repossess (for example your house).
Secured loans are loans in which the creditor will agree to provide you with the loan but will insist on something like your house as collateral – the loan is secured against your home.
Similar to a balance transfer fee, a secured loan might have an origination fee attached to it, which can be in the region of 1-8%. Of course, all rates are subject to your credit score and circumstances.
Pros To Debt Consolidation
Debt consolidation will collate all of your debts and make them manageable. Not only will you know you have only one debt to pay off, you know exactly how much it is and for how long it will take to clear.
Cons To Debt Consolidation
It depends on your circumstances. Debt consolidation would be better for those with multiple debts and high interest rates, but may not be the best choice for you.
It also does not stop you racking up the debts again on the credit cards you may now have cleared. Additionally, the interest rates may be unfavorable and you’re stuck paying an agreed amount each month for a number of years, which is a big commitment.