Paying off all your debts can be a daunting, time-consuming task, and being in this financial situation is exhausting with all the high interest that comes from your debts. It may seem like there’s no light at the end of the tunnel because of the tremendous amount of money you owe.
If you’ve decided to start paying off your debts, you have probably encountered the terms debt consolidation and credit card refinancing already. However, for those who haven’t heard of these two terms yet, here is what debt consolidation and credit card refinancing are.
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Debt consolidation is the umbrella term for the process of taking a personal loan to pay off your debts, which can save you money on interest payments and simplify the payment process. On the other hand, credit card refinancing is the process of paying off your credit card debt using another credit card with a higher limit.
While these two methods serve the same purpose of paying off debt, they go about it in completely different ways. The terms may often be used interchangeably, but here are the important differences:
To understand these terms better, let’s take a closer look.
As previously mentioned, debt consolidation is the process of transferring all your balance to a loan instead of a credit card so that you will have an easier time meeting the monthly payment it entails. This method of paying off your debt may seem intimidating at first, but it offers a fixed payment within your budget, a lower interest rate, and a set pay-off date.
If you have multiple debts with high interest rates, credit card refinancing can be more expensive than debt consolidation.
If you are interested in using this method to pay off your debt, you will need to take a personal loan. If you have many different debts, this option makes repayment much simpler because you will only have one monthly payment to think about.
Of course, it means having a credit card with so high of a limit, but that shouldn’t entice you to keep spending. It should, instead, motivate you to pay off your debt so you wouldn’t have too much of a responsibility.
Personal loans by companies and credit card companies alike offer you a fixed interest rate. So, it wouldn’t be too much as compared to when you have multiple debts with fluctuating interest rates for each of them. Aside from that, it has fixed monthly payments in a given time, so paying off your debt will, hopefully, become easier for you.
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Apart from debt consolidation, another method for paying off your debt is credit card refinancing. It is the process of transferring your credit card balances into a different credit card that has a lower interest rate.
Hopefully, this way, it will be easier for you to pay off your debt. Unlike debt consolidation, it does not offer a fixed monthly payment.
Unlike debt consolidation in which you need to take out a personal loan, credit card refinancing means transferring all your loan into one credit card with a low annual percentage rate (APR). This may not work for everyone else, so there’s another option, too, a home equity loan.
However, at this point, the house is collateral, so that means it is dangerous since a missed payment can equate to a loss of home in the long run. Regardless, these are more manageable options than trying to repay multiple debts with high interest rates.
Although it does not offer a fixed monthly rate with fixed interest rates, this is an alternative for those who cannot manage debt consolidation. However, it will be harder to plan for your monthly payments because they can fluctuate.
If you would like to determine the minimum payment of your credit card, you may use this calculator. To help you weigh your options better, here are the pros and cons of debt consolidation.
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You should choose how you would want to go about your debt, depending on your risk appetite. If you are capable, you can opt for debt consolidation. But, if you are conservative with your money and with your overall expenses, you should most likely opt for credit card refinancing.
What you should choose depends on your needs and the risk you can take on, so the first thing you need to know is your capability in paying off your debt and how long you can pay it off. Prudent Financial Solutions provide a consultative and tailored approach to help people burdened with debt by providing financial solutions that are prudent and aligned with their financial goals.
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Michael is the Chief Revenue Officer and co-founder of Prudent Financial Solutions. Michael’s career in the FinTech space began in 2015 as a Financial Consultant at Strategic Financial Solutions. Michael quickly became a top producer in the organization. He served as a member of the internal advisory board that helped streamline processes and drive organizational change. He later joined Premium Merchant Funding, an alternative lending firm that specialized in small and medium business financing. Michael served as Managing Director of G&G Funding, where he managed a full sales team and was responsible for driving revenue. Michael graduated from Providence College with a Bachelors of Science in Finance and Accounting.