Published in: Credit Cards | Oct. 8, 2019

Credit Card Refinancing vs. Debt Consolidation: What's the Difference?

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Debt consolidation and debt refinancing can both help you deal with debt. But there are differences between the two. 

Being in debt can be a major financial burden, especially when you have credit card debt at a high interest rate and much of your monthly payment goes toward paying interest rather than the principal. The good news is that there are techniques you can use to help you pay off your credit card debt or other loans more easily.  Debt consolidation and debt refinancing are two of those techniques.

And although debt refinancing and debt consolidation can involve taking similar steps and have similar effects, they are not the same. 

  • The goal of debt consolidation is to combine multiple debts into one -- which may or may not lower your interest rate depending on the type of consolidation. 
  • The goal of refinancing is to take a new loan with better terms than those of your existing debt and use it to pay off one or more credit cards or other loans. This could involve consolidating multiple debts with your new loan, but it doesn't have to. 

Although you can consolidate and refinance your debt at the same time, it's important to understand the differences between the two processes. 

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What are the key similarities between debt consolidation and credit card refinancing?

Both debt consolidation and credit card refinancing require you to take out a new loan. There are a number of different sources of financing you can use to consolidate debt, including  personal loans and home equity loans. The availability of a new loan to either consolidate or refinance debt (or both) will depend upon your credit, income, and other financial details. 

You can also get a loan that’s specifically marketed as a "debt consolidation loan." These are sometimes available even to borrowers who don’t have very good credit. But they can charge high interest rates and expensive fees, so you'll want to read the fine print very carefully if you're considering this type of financing. 

Credit card balance transfers are an option for both debt consolidation and debt refinancing. When you do a balance transfer, you get a credit card that allows you to move other debt onto it. Usually, you can only move credit card debt onto the new card, but some card issuers will give you balance transfer checks you can use to pay off other loans. Balance transfer cards are especially useful for credit card refinancing because they make it so easy to transfer the balance from your old card to your new one. 

Balance transfer cards usually offer a special low promotional APR, which could be as low as 0%. If you move the debt from just one old credit card onto your new balance transfer card to take advantage of the low rate, you are refinancing your credit card debt. But if you move multiple debts onto the new card -- either just from credit cards or from cards and other types of loans -- then the balance transfer card also makes debt consolidation possible. 

What are the key differences between debt consolidation and credit card refinancing?

There are also some differences between consolidating debt and refinancing it.

First and foremost, you can refinance just a single loan or a single credit card, whereas consolidation always involves combining multiple debts into one. 

  • If you owe money on one credit card or loan but want to change the interest rate or repayment terms, you can refinance just that loan or card. You can refinance it either with the same lender or with a different one. You'll apply for the new loan or for a credit card balance transfer offer. If you’re approved on more favorable terms, you'd pay off your credit card or other debt. Then, you'd pay the new lender at the better rate. 
  • Consolidation, on the other hand, is aimed at simplifying the repayment process by getting one new loan and using it to pay off multiple existing creditors. You can consolidate all different kinds of debts and can even pay off multiple loans and credit cards with your new consolidation loan. Ideally, your new loan will also have a lower interest rate, but reducing your rate isn't the main purpose -- the main purpose is to simplify debt payoff. If your new consolidation loan has the same interest rate as the old debt, you may still decide on a consolidation loan just so you don't have to juggle multiple loan payments every month. 

It's also important to note that there's a specific type of debt consolidation for federal student loans. If you owe money to the federal government, including on Stafford Loans or PLUS Loans, you can get a Direct Consolidation Loan from the Department of Education. Your Direct Consolidation Loan doesn't change the terms of your debt -- your new interest rate is a weighted average of the rates on existing loans -- but it does consolidate all federal student aid into one big loan. 

You can also refinance student loans, including both federal and private loans -- but you can't refinance with the government. You'd need to do this with a private lender and would have to give up some of the protections that federal student aid provides, including income-driven repayment plans; flexibility in terms of repayment plans; generous deferment and forbearance options; and access to loan forgiveness programs.

Consolidation loans from the government aren't available for credit cards either. You always have to get a loan from a private lender or take advantage of a balance transfer if you want to refinance or consolidate credit card debt. 

Should you choose debt consolidation or credit card refinancing?

In many cases, you don't have to choose. You can get a new loan that both consolidates and refinances your credit cards or other loans. 

But if you have just one credit card or loan you want to change the terms on, then refinancing would be the right approach. Or, if you want to combine multiple federal student loans into one big loan without losing borrower protections, consolidation through a Direct Consolidation Loan would be your only option. 

Don't consolidate or refinance debt without a plan

Both debt consolidation and debt refinancing can help or hurt your finances depending on the new loan you take out. You also need to make sure you have a plan to pay off the debt on time, otherwise you are just moving from one loan to another. 

By making a plan to deal with your debt proactively and researching all your options, you can find the solution that is best for you and hopefully become debt-free ASAP.

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