Dealing with debt is a stressful endeavor. From rising interest rates to active CCS collections, it might seem like it’ll be impossible to get your financial freedom back–but there are ways to make it more manageable, especially when you seek help from credit repair services in Georgia. Two of these are debt consolidation and credit card refinancing.
Debt consolidation is the process of rolling different types of debt together into a single loan, while credit card refinancing involves the transfer of balances to another credit card with better interest rates and terms. Both are similar, but they vary in terms of interest rates and repayment periods, so one might be better than the other depending on certain debt situations.
What Is Debt Consolidation?
Debt consolidation refers to the process of taking out a debt consolidation loan or a personal loan to pay off multiple credit card balances and other debts (e.g. student loans) in a single payment channel. It simplifies bills since it keeps everything in one place, plus it may come with the advantage of lower fixed interest rates depending on the applicant’s credit score.
To consolidate your debt, you first have to take out a loan with a lower interest than what you currently pay. There are generally two types you can apply for: secured loans and unsecured loans. Secured loans are guaranteed with an asset as collateral. Unsecured loans, on the other hand, don’t require collateral; they’re harder to get and often come with higher interest rates than secured loans.
Pros and Cons of Debt Consolidation
The top advantage of debt consolidation is that it makes payments more manageable by rolling everything into one channel. Plus, with a single loan payment, you can enjoy lower fixed interest rates, which makes paying more straightforward and more predictable.
That said, debt consolidation also has its drawbacks, especially if you have a bad credit score. You might not have access to low-interest rates; you may not even qualify for a loan at all. And as with any personal loan, taking this option is risky, particularly if you’re getting a secured loan as you may lose your assets if you fail to make payments.
What Is Credit Card Refinancing?
Credit card refinancing is the process of moving your credit card balance/s from one card or lender to another with lower interest rates. This allows you to get more favorable terms on your payments so that you can pay your credit card debt faster.
Credit card refinancing is usually done by getting a balance transfer credit card, which allows you to move your balances from other cards to this one up to the agreed-upon credit limit. Some issuers allow free transfers, but many will charge a fee of 3% to 5% of the transferred total. If your debt is higher than the limit, you’ll have to choose which to transfer, prioritizing those with the highest interest rates.
In most cases, balance transfer credit cards will offer an introductory period of 0% interest or a very low-interest rate for anywhere between twelve and twenty-one months. Ideally, you should pay off your debt by this time; otherwise, the card will likely apply interest charges as high as 25%.
Pros and Cons of Credit Card Refinancing
Having all your credit card balances in one place is convenient, but the best advantage of credit card refinancing is the zero (at least ultra-low) interest rates. This allows you to only pay your debt in full without any additional interest piling on month-on-month. However, this introductory period doesn’t last forever and it comes with some terms.
If you can’t finish your payments by the end of it, you might end up getting buried in even more debt. You’ll have to be diligent with payments, otherwise, you may receive penalty annual percentage rates (APR) that are higher than average, or your introductory promo might be canceled.
Debt Consolidation Versus Credit Card Refinancing: Which Is Better?
Choosing between debt consolidation versus credit card refinancing will ultimately depend on your unique financial state. If you have multiple debts, want to pay low-interest rates, and can only manage smaller payments for a longer period, debt consolidation is the way to go. If you have a high credit score and smaller debt, want to leverage zero interest rates, and can diligently make payments within about a year, then credit card refinancing is a suitable choice.
To know which option is better for you, it helps to consult a credit repair company like The Phenix Group. We can assess your credit score, debt situation, and payment capabilities and come up with the ideal solution to get you back in good financial standing.