Credit card refinancing vs debt consolidation

Credit card refinancing and debt consolidation offer similar benefits, namely reducing the costs of paying off debts, lowering monthly payments, and streamlining repayments. However, there’s one key difference between the two. Debt consolidation refers to consolidating and refinancing debts of any type, while credit card refinancing refers solely to consolidating and refinancing credit cards.

The average credit card rate is 21.51%, according to the Federal Reserve. Comparatively, a two-year personal loan has an average rate of 11.92%. If you’re struggling to keep up with debt payments, refinancing your debt with a personal loan may help. 

What is debt consolidation?

Debt consolidation refers to paying off two or more existing debts — not necessarily credit card balances — with a single loan. For example, if you have a $15,000 private student loan and a $3,000 credit card balance, you could use an $18,000 personal loan to pay off both and consolidate your debt. Ideally, you would also refinance into a lower rate to lower your monthly payments and/or overall interest costs.

Note: Different loan types can be used to consolidate debt, including personal loans, home equity loans, and credit cards. 

A wide range of consumer debt types can be consolidated such as credit card balances, student loans, medical bills, payday loans, “buy now, pay later loans,” title loans, and personal loans. 

The types of credit products you can use to consolidate debt are the same as those you can use for a credit card refi. Personal loans and home equity loans are commonly used to pay down debt. Balance transfer cards may also be an option if you’re able to pay off your lenders using a credit card (some companies only allow payments from a debit card or bank account). 

What is credit card refinancing?

Credit card refinancing is using a lower-interest loan or credit card to pay off one or more higher-interest credit card balances. For example, let’s say you have a credit card with a $5,000 balance and a 30% annual percentage rate (APR). If you get approved for a balance transfer card with an 18.00% APR and a large-enough credit limit, you could take advantage of the lower interest rate by transferring the $5,000 balance from your existing card to the new card. 

Credit card refinancing only refers to paying off and refinancing credit card balances, but you can pay off the balances using several different credit products, including:

• Personal loans
• Balance transfer credit cards
• Home equity loans or home equity lines of credit

However, you generally can’t use a credit card to pay off another credit card’s balance without transferring the balance and paying a balance transfer fee to do so. 

Credit card refinancing vs. debt consolidation

Credit card refinancing and debt consolidation are virtually the same but have one key difference. Credit card refinancing refers to refinancing just credit cards (and potentially consolidating multiple balances), while debt consolidation refers to refinancing and consolidating many types of debt, including credit cards. 

You may hear the two terms used interchangeably, especially if you have credit card debt. 

When does it make sense to refinance credit cards?

It can make sense to refinance credit cards when you’ll gain one or more of the following benefits:

• Simplify your monthly payments: If you consolidate multiple credit card debts, you’ll reduce the number of monthly payments you need to make.
• Save on interest overall: If you can get a new loan or balance transfer credit card with a lower rate than your current card(s) and don’t extend your repayment term, you’ll be able to reduce total costs. 
• Lower your monthly payment amount: Refinancing and extending your repayment term and/or lowering your rate can lower your monthly payment amount.
• Boost your credit: If you use an installment loan to pay off credit card balances, it can potentially lower your credit utilization percentage, which may help to provide a quick boost to your credit score. 

As you weigh the pros and cons of a credit card refinance, run the numbers to see if you’ll save monthly and overall. To do so, you’ll need to collect the balances, APRs, monthly payment amounts, fees, pay-off timelines, and total interest costs of the card(s) you want to refinance. Further, you’ll need to collect the same details for the loan or balance transfer credit card you’re considering. Then, compare them side by side to see which is better. 

For example, suppose you have a credit card with a balance of $3,500, an APR of 30%, and a minimum monthly payment of $110. It would take approximately 62 months to pay off, and cost about $3,273 in interest. However, if you refinance the balance using a five-year personal loan with a 20% APR, you would lower your monthly payment to $93 and your total interest costs to $2,064, according to Credible’s personal loan calculator.

In this case, refinancing into a personal loan would save you $17 per month, cut two months off your repayment term, and save you $1,209 overall.

When does it make sense to consolidate debt?

The potential benefits of debt consolidation are the same as those of credit card refinancing. You’ll want to figure out if the consolidation can simplify your repayments, reduce your monthly payments and overall borrowing costs, or help your credit. So, again you’ll need to run the numbers. 

When doesn’t it make sense to consolidate debt?

Above you saw a scenario when a refinance makes sense. Now, let’s explore when a debt consolidation may not be the best move. Suppose you have the following debts:

• Debt 1: $3,000 credit card balance with a 20% APR, $110 monthly payment, 36 remaining payments, and $955 in remaining interest charges.
• Debt 2: $10,000 private student loan with an 8% APR, $203 monthly payment, 60 remaining payments, and $2,166 in remaining interest charges. 
• Debt 3: $2,500 medical loan with an APR of 15%, $87 monthly payment, 36 remaining payments, and $620 in remaining interest charges. 

In total, you’d owe $15,500 and would have an average APR of 11.5% (weighted according to the size of each balance and its APR). If you then got approved for a $15,500 five-year personal loan with a 13% APR, it wouldn’t make sense to refinance because you would be increasing the APR, which means your monthly payment and interest costs would also increase. 

Weighted average APR

When assessing how much you’re currently paying across multiple debts with multiple interest rates, you usually can’t just average those interest rates. For instance, if you have three debts, one with a 10% APR, one with a 15% APR, and one with a 20% APR, it might seem like your average APR is 15%. 

(10% + 15% + 20%) / 3 = 15%

But that would only be the case if you owe the exact same amount across each of those debts. If you owe different amounts (and you probably do), you need to account for that. For example, say you owe:

• Debt 1: $1,000 at 10% APR
• Debt 2: $1,000 at 15% APR
• Debt 3: $10,000 at 20% APR

To calculate the actual APR you’re paying, you need to apply each balance to its APR. Here’s how:

Step 1: 

Add up the total amount you owe.

• In this case, $12,000

Step 2:

Divide each individual balance by the total amount (write those numbers down).

• Debt 1: $1,000 / $12,000 = 0.083 
• Debt 2: $1,000 / $12,000 = 0.083 
• Debt 3: $10,000 / $12,000 = 0.833 

Step 3:

Multiply each of the numbers from the second step by the APR for that balance. 

• Debt 1: 0.083 x 10% APR = 0.83% APR
• Debt 2: 0.083 x 15% APR = 1.245% APR
• Debt 3: 0.833 x 20% APR = 16.66% APR

Step 4:

Finally, add the numbers from the third step together to get the actual rate you’re paying on all your debt.

• 0.83% APR + 1.245% APR + 16.66% APR = 18.74% APR

Paying an 18.74% APR, overall, makes sense since most of your debt is at the 20% rate. To help you determine whether a debt consolidation loan is worth it, use these steps to see if you save money for all of your debt. 

FAQ

Where can I get a debt consolidation loan?

Debt consolidation loans can come in many forms. If you want a personal loan, look to banks, credit unions, and reputable online lenders. If you want a home equity loan, look to banks and online mortgage lenders. Balance transfer cards are available from a variety of leading credit card providers, and you can check your current cards for balance transfer offers. 

How long does debt consolidation take?

The amount of time it takes to consolidate a debt varies depending on the loan type you get, the lender you choose, and the debts you’re consolidating. If you opt for a personal loan, some lenders offer funding as soon as the same day you apply — although many require a few business days. Once you have the funds in your bank account, you can pay off the debts you want to consolidate but may have to wait for the payments to clear, which can also take a few business days.

How does debt consolidation affect your credit?

It depends on your credit history, which debts you pay off, and which credit product you use. Most people see a drop of five points or less when they apply for a new credit product due to the hard credit check lenders perform. However, paying off credit cards with an installment loan can improve credit scores quickly due to the drop in credit utilization. Making on-time payments on the new loan or card may also help to strengthen your credit over time. 

Can I get a debt consolidation loan with bad credit?

You may be able to get a debt consolidation loan with bad credit (bad credit is a FICO score below 580). For example, some online lenders, including OneMain Financial and Upstart, weigh certain factors like your income and education more heavily than your credit score. If you’re struggling to qualify on your own, you could try applying with a co-borrower or with a cosigner.