With Credit card refinancing and debt consolidation, the jury is out on the difference between the two. Why do so many people use the terms interchangeably? Is there even in the terms? These are all valid questions, and hopefully after reading this blog post, we can come out with a clear understanding of it, and we will go over whether one is good for you, or not.
In order to be as clear as possible on this topic, not only will I talk about all of the poor and sorrowful mistakes a brotha made (I am the “brotha”), and how I feel upon this information, but I will also talk about the following topics in this blog post:
- Why Credit Card Refinancing or Debt Consolidation
- Balance Transfers, Home Equity Loan, Personal Loans
- What is Credit Card Refinancing
- What is Debt Consolidation
- Which is Better
- Advantages and Disadvantages of Credit Card Refinancing
- Advantages and Disadvantages of Debt Consolidation
I personally know people who are business owners and began before the outbreak of the pandemic. they realized it was a great time to start a business and generate extra income and this was their chance to begin. after COVID swept the world everybody’s original plans were turned upside down. people stayed home, streets were empty without traffic, and life was turned upside down.
Since I am in the business space I have seen a lot of those business owners start out very eager full of excitement, only to know be in a bunch of debt, a horrible business, And much regret with many bills to pay. this took place with the vehicle of personal loans, business credit cards, and other special programs.
other people may have loans from other things. I know a ton of people in America apply for forbearance so that they did not have to make payments on their mortgage and now that grace period has ended. the amount that was suspended for the mortgage is now do. people with car payments also had a lot of the same options as well as personal credit cards. many people are in more depth then what they started out with before the pandemic.
one of the legitimate ways of getting out of debt and taking more control of your life is applying for personal loans and also refinancing credit card debt. For the sake of this article I am going to qualify credit card refinancing as Either moving your debt to a another credit card with a 0% introductory rate, or having the ability to renegotiate your interest rates with your pre existing cards.
I’ve read many articles and seen many videos where credit card refinancing is reduced to only getting a personal loan to pay off all of the credit card debt, leaving you with only one payment on that specific loan so that you’re not making multiple payments on all of your the credit cards. I do not qualify this as refinancing your credit cards. we will get into that soon.
despite the reason that you are looking at these two options there are many reasons to justify why this is a good idea and there are also reasons why this may not be the best option for you. I will try my best to give you the best information possible so that you can make an educated decision as we go through this journey together.
I have done both many times and it will probably not be my last, but I have learned a lot on how to properly take advantage of each method. by the end of this blog post you will feel comfortable with your next decision and hopefully you’ll be able to thank me for it 😊
Balance Transfers, Home Equity Loan, Personal Loans
I hate to be that annoying teacher in class that breaks down all the terminologies and definitions of something before jumping into the meat of a subject matter, but in this since I think it is necessary. a lot of terms are thrown around when it comes to this and you need to know the difference in order to separate the facts for debt consolidation versus refinancing credit cards.
Balance Transfers
I get about three pieces of balance transfer offers every day in my mailbox. it’s quite annoying but I do look at them all because some of them are quite enticing. I get offers such as being able to qualify for $50,000 with a 2% interest rate! Quite honestly that is freaking amazing!
I also get some outlandish things like $20,000 with a 15% rate. now if you’re anything like me I get sick of looking at how much debt I have on a consistent basis in making payments, but I am not desperate. I know that the power is in my hands and I have the ability to negotiate whatever rates I so desire. if you are in a position to where you have bad credit, you may not be and the greatest position for negotiation. However you still more power than you think.
Credit cards also do balance transfers. I’ve been getting some really cool offers from my credit cards lately. they see that I’m paying down the balance and they want me to stay in debt because that keeps them in business and so instead of me paying them off quickly, they alleviate this by sending you 0% offers with a 0% interest rate so that you can take your time to pay them off.
there’s many ways to get balance transfers. it’s nice to have because you will have everything in one lump sum, and you will make one payment. depending on the balance transfer, it may be classified as a loan, and in other cases it may not be qualified as a loan. every situation is specifically unique and you have to find out what works for you if you’re considering ballast transfers.
Home Equity Loans
home equity loans is a very interesting topic because you can do so many different things with them. it works just like a personal loan however it is based off of the equity that you have in your house. if you purchased a home and got a loan from the bank for $150,000 and you’ve paid off $50,000, that means you have $100,000 left to pay off on a house. you now can pull a loan, or a line of credit from that $50,000 that is paid off.
once you do this you can use it for anything. many people do renovations on their houses, some people do this and start a new business (which I highly do not recommend), some people use it to pay off colleges in student loans, or in our case pay off debts. This is why it is so important to be able to own your own assets, such as a real estate property (aka your house).
as a black male in America, and a millennial, it is not a popular idea to own a house at an early age. Many people may not have this option because they or either not homeowners or they purchased a house most recently and haven’t built any equity. that is unfortunate because if we were taught a little different we would understand the value of home ownership and options that it gives us. I was curious and started reading a lot about real estate in my 20s, and so thank God, this is an option for me.
The problem with home equity loans is that it ends up being a second mortgage. Earlier I had mentioned about being desperate. Any decision made in desperation is hardly ever a good one. In life, and ESPECIALLY in finances. taking out a second mortgage you are creating another vehicle of debt that you did not have before. if you are doing this for a payoff or a true emergency, I can understand. but if you’re just doing this to get something else that will create another payment, or you’re doing something that will not pay you back in the future, I do not recommend it.
In this article I’m not really going to be touching on home equity loans but I did once a highlight it to show you another option. a lot of bloggers like to touch on home equity loans in order to transfer credit card’s debt over to it as a form of refinancing. I would qualify that as a personal loan.
Personal Loan
Do you remember how I talked about getting a lot of weird parcels of mail about balance transfer offers? the same thing happens with personal loans. these companies are just like magicians, knowing that I’m looking for a magic potion to solve my problems to get out of my $60,000 of debt. how do they know? since I previously worked with a financial institution in order to get people business credit up to $100,000, I have an idea of how they do it but I’m not going to get into it here.
Though I’m looking for somebody to use their magic, and by the wave of a wind make all of my debts go away, I know it’s not that easy. this has to be something done at a slow pace, with a well thought out strategy. a lot of the offers from personal loans we’re very similar to the balance transfers, and some of them were better. to be honest with you given the right scenario, it’s really a no brainer.
However, just like the ballast transfer, you will be committed to making one payment for the lifetime of that loan that you agree to. this can be a gift and a curse and itself.
Now that I’ve broken down some of the terminology, let’s jump into the reason why you fell upon this blog post. credit card refinancing versus debt consolidation. let’s go!
What is Credit Card Refinancing
Credit card refinancing is the ability to move your interest rates on your pre-existing cards, to another card with a lower interest rate, or having the ability renegotiate your current interest rates to lower interest rates.
This may not be the definition of others when it comes to refinancing your credit cards, but in my opinion, refinancing typically doesn not involve getting a loan from another financial vehicle such as taking money out of your 401k, or a home equity loan. I call that process, taking out a loan lol!
Most people will consider credit card refinancing if they find themselves stuck paying super high monthly payments, and they notice that the payments are not necessarily going towards the principal amount so that the debt could be paid off. If you’re making $500 payments on a $10,000 balance, but only $100 is going toward the balance, at this rate it will take you a little more than 8 years to pay it off!
My friend, if this sounds like you, we need to do something about that so that all of your money can be applied to something better. I know how it is because at one point, I had nearly 90% of the money that came in, go towards debt. How can this be good when you still have to eat? If this is you, hopefully I can bring some clarity and relief to your situation.
Advantage of Credit Card Refinancing
Credit Card Refinancing has it’s perks to it. It may get a bad wrap from people such as Dave Ramsey, but we all do not have the fortunate choice of being a millionaire. If you’re in the position of looking at this as an option, you most likely have multiple credit cards and they all have separate minimum payments. Chances are that they have gotten out of control either due to overspending or the interest rate has shot up.
You realize that you need to get this under control asap and it would be a better option to make one payment that takes care of all of your debt. If that is not an option, then there is the wish the minimum payments were brought down low enough to a controllable amount. I mean, you would at least like to save SOME of your hard-earned paycheck, right?
Many creditors have some fantastic programs that allow you to do a balance transfer with their programs made available. Some of these programs do not make it necessary for you to run a credit check and open up a new loan, and those are the programs that I would point you to. Many times these programs have a 0% interest rate for a certain duration of time. If you find a program like this and the grace period is 12-18 month, it only makes sense to make that move.
If you’re using the other technique of calling your creditors and negotiating your interest rate to be brought down, you may not get the 0% introductory rates, but you be able to get a lot lower than what you’re currently paying! This can be the difference in your monthly payments being $350 vs $89 per month. That’s HUGE (in my Donald Trump voice).
Disadvantages of Credit Card Refinancing
If you’re going to go down this road, I want you to error on the side of caution. One of the things that I struggle with when it comes to payments is paying more than the minimum amount due, and paying off the balance in a certain time. I can’t tell you how many 0% intereat credit cards that I own, and I ran up the credit to the max and let the balance sit there while my 0% interates rate grace period ended, and then flew up to 24%. Make sure you’ve developed a plan, and stick with it.
If you’re calling your creditors to lower your interest rate and you are successful, often times the terms are temporary. as I have stated throughout this blog post, you have to set goals and be really serious about attacking them. I urge you to not be like me, acting as if there is not a sense of urgency. I know that this is being done for a reason and you were trying to knockout your debt if you’re going as fast as possible.
If you’re using the renegotiation rates as opposed to finding special offers that your creditors are providing for 0% balance transfers, also know that you will still have multiple payments instead of creating one payment to your debt. Even if you were successful at finding programs under your creditor for a balance transfer, the amount allotted to you May only cover one credit card versus moving all of your credit cards to that one program, much like a personal loan. This will result in multiple payments.
What Is Debt Consolidation
Debt consolidation is bringing all of your debts under one personal loan so that you can make one payment in order to pay off the balance. For bigger balances of $20,000+, it will typically take 2-5 years in order to pay off the balance.
Advantages Of Debt Consolidation
Bring all of your debts into one place so that you can make one payments, can bring peace of mind. Having to pay for all of your debts and watching your hard-earned money leave your bank account the second it is deposited, is not a good feeling. As a matter of fact, it is depleting! Debt consolidation is one of many vehicles to gain your freedom back.
If you’re going to apply for debt consolidation, you want your monthly payment to be less than the total amount that you are paying all of your different creditors. Instead of paying $1000 each month, you may be able to group all of your debts and pay $500 a month! Estupendo (Amazing) right? !
If have $10,000 or less of total debt, you can easily knock this out within a year. Not only would things become more affordable to pay off, but you may also have the opportunity to pay a little extra toward the balance so that you can pay things off faster.
If you have $20,000+ and it comes out that you will have to take 2-5 years to pay everything off, you have to be ok with that. If this is the cost of freedom for you financially, then I will support you. It would be equivalent to a car payment in my opinion. Most people do not think twice before purchasing a new car, so why not do the same thing to get out of debt?
Disadvantages Of Debt Consolidation
Bringing all of your debts under one roof (bringing your debts under one loan) so that you can make one payment each month is very satisfying. However, let’s say that things in life change for you after a year. You become more financially fit, and you’re wanting to change the terms of your payments on your loan.
Previously, in the advantages of debt consolidation, I spoke about car loans…how many people have no problems getting a new car and being in a loan for the next 5 years. The problem with is? You now have this nagging new payment, each month, for 5 years.
Once the terms of the debt consolidation is made, that will not be a way of changing it. Unlike the credit card refinancing examples I gave about renegotiating the interest rates, you cannot call and renegotiate the monthly payment terms, nor the interest rate terms. What you agree to is what you have to pay for the remainder of the duration until you pay off the balance.
So Which Is Better? Debt Consolidation or Credit Card Refinancing
A quick side note before I give you want you want…
Something needs to be said with both methods that I elaborated on within this article. Whenever you take multiple vehicles of bed, and put them all under one roof, something happens to your credit usage. Everyone has a credit score. If you have 9 credit cards open and 1 car loan, that means you have 10 accounts open. If you move all of those to one loan, your credit usage immediately goes down even though the total balance is still the same.
When you do this, Experian will make a drastic change to your credit score! They will say that you are no longer over-leveraged and not a risk, but now you are a new candidate for better credit offers! Your credit score will make an amazing leap, and you will be shocked at how making little financial moves like this can positively effect your credit score.
Now that I got my 2 cents in, let’s get into why you are really reading this section of the blog. Which is better? Is credit card refinancing best for your situation? Or will it be debt consolidation that is best for your situation?
There is no perfect answer here. It truly depends on what obstalcles you are facing and what goals you want to conquer. If you absolutely, have no money after you pay your bills, you need immediately relief. I encourage you not to make emotional decisions because you will always make the wrong ones. Be calculated. In this case, you may be going crazy watching all of your money go to all of these different places and you’re not able to save any money. If this sounds like you, debt consolidation maybe your best bet.
In some ways, I would consider debt consolidation my last resort because I am getting into something that is very long term like an unneeded relationship, but it may be what I need. No one wants to have a payment over the span of 2-5 years, or maybe even 7 years, but if this is what you need to gain control of your financial life, I will not be opposed. Some of you may be choosing between putting food on the table versus bills with no light in sight. This may be the best option for you as well.
If you have a little wiggle room and you can afford to manipulate things in your favor after allowing some time to pass by, credit card refinancing may be the best fit for you. You may be tight and have to be extremely frugal at times. Your account may go negative every now and then but if you manage your money properly, your needs are taken care of, but you cannot get anything as it pertains to your wants. Refinancing your credit cards may sound good to you.
Sometimes it is just a matter of limiting your spending habits and paying a few dollars extra on those credit cards to make your payments manageable. I know in my case, I have a $3000 credit limit on one of my cards and I get it down to $500 fairly quickly. But then I see an opportunity where I lie to myself and I end up swiping the card, only to find out that I don’t keep up with how much I’m spending. Now I’m back to $3000! If that sounds like you, Pay off your smallest balance quickly, and then readjust your budget! It can be that simple for you!
You may also have the time to call your creditors and negotiate those interest rates. I’m not going to lie…that part can take some time and pateience. Often times the person you originally speak to may not be available to help with that and so you have to ask to speak to a manager. This may take a few tries 😊 It may also take a few tries to find out all of the different programs a creditor may be able to offer you. At the end of the day, these creditors want your business and they don’t want you to leave. If you’re not spending their money, their not in business, so they want to work with you!
I personally love the fact that I can work and negotiate with my debtors. As my balances get lower, I get offers for balance transfers like crazy. I then move my debt over to those while taking advantage of 0% interest rates, and then I go ballistic on those payments.
I actually have an account where I consolidated some debt. It was a poor business move because it initially was supposed to be temporary after getting money for my business credit, but like I said, I made some poor decisions (story of my life). That has now become permenant! But I have goals in place and I look to getting that paid off by summer of this year.
Conclusion
As a business person, I love creative finance methods. My thoughts and actions about money is totally different from Dave Ramsey. However, based upon the situation I am in due to bad decision, I am in the positions that Dave Ramasey tries to keep his listeners from out of. If I would have handled my money correctly, I wouldn’t be writing this article.
So which is best? Whatever you decided, may it be your decision. Do not regret your decision and move forward with it. You can now make the educated power-move as to what to do next.